Japan business mood hits four-year high, keeps BOJ rate-hike view alive

[TOKYO] Big Japanese manufacturers’ business sentiment hit a four-year high in the three months to December, a closely watched survey showed on Monday (Dec 15), reinforcing market expectations that the central bank will raise interest rates this week.

But firms expect conditions to worsen three months ahead as they fret over the impact of higher US tariffs and soft consumption, highlighting uncertainty over how far the Bank of Japan (BOJ) could eventually push up borrowing costs.

The headline index measuring big manufacturers’ business confidence stood at +15 in December, the BOJ’s “tankan” survey showed, up from +14 in September and matching a median market forecast.

The reading, which marked the third straight quarter of improvement, was the highest since December 2021 in a sign that firms were weathering the hit from higher US tariffs for now.

An index gauging big non-manufacturers’ sentiment stood at +34 in December, unchanged from September and roughly in line with market forecasts for a reading of +35.

“All in all, the tankan backs up dominant market views that the BOJ will raise rates in December. Unless a huge shock hits the economy or markets, it is likely to proceed with a hike,” said Masato Koike, senior economist at Sompo Institute Plus.

Big firms expect to increase capital expenditure by 12.6 per cent in the current fiscal year ending in March 2026, the tankan showed, compared with a median market forecast for a 12 per cent rise.

Sources have told Reuters the BOJ is likely to raise its short-term policy rate to 0.75 per cent from 0.5 per cent at its Dec 18 to 19 meeting on receding fears that US President Donald Trump’s tariffs will severely hurt the export-reliant economy.

Big firms saw sales prices as having risen in the fourth quarter and expect prices to keep increasing in the coming three months, the tankan showed, a sign that solid demand was enabling them to pass on higher costs to consumers.

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Underscoring uncertainty over the outlook, however, the tankan showed companies projecting business conditions to worsen three months ahead.

While fading uncertainty over US trade policy helped brighten the business mood, many firms worried that labour shortages and the hit to consumption from higher prices clouded the outlook, a BOJ official told a briefing.

An index measuring job conditions showed firms saw the job market at its tightest since 1991, when Japan was experiencing an asset-inflated bubble, suggesting labour shortages could curb growth in an economy facing a dwindling working-age population.

Japan’s economy shrank in the three months to September as exports fell in the face of US tariffs. But analysts expect growth to rebound in the current quarter, as exports and factory output show signs of recovery.

With inflation exceeding its 2 per cent target for well over three years, a growing number of BOJ board members have signalled their readiness to vote for a rate hike to avoid being behind the curve in addressing the risk of too-high inflation.

Companies expect inflation to hit 2.4 per cent one, three and five years ahead, the tankan showed, suggesting corporate inflation expectations are becoming anchored around the BOJ’s 2 per cent target. REUTERS