Japan Business Mood, Inflation Signs Both Rise
By Reuters | 31 Mar, 2026

An interest-rate hike appears likely in April on a rise in both business sentiment and likelihood of corporate inflation.

Japan saw the business mood improve and corporate inflation expectations heighten in the three months to March, a closely watched survey showed, helping the central bank make the case for an interest rate hike as soon as this month.

But firms expect conditions to worsen ahead as soaring fuel costs from the Iran war threaten to squeeze margins, the "tankan" survey showed, highlighting looming risks to a fragile economy that complicates the Bank of Japan's rate decisions.

"Companies are obviously worried about the fallout from the conflict. As fuel costs spike, they will have little choice but to raise prices," said Mari Iwashita, executive rates strategist at Nomura Securities.

"Corporate inflation expectations are also heightening. All in all, the tankan points to mounting inflationary risks, which may increase the chance of an April rate hike," she said.

Big manufacturers' business sentiment improved for the fourth straight quarter with the headline index slightly exceeding market forecasts to hit +17 in March, up from +16 in December and marking the highest level since December 2021, the survey showed on Wednesday.

Robust demand for AI chips and receding uncertainty over U.S. trade policy offset the strain from rising input costs and the Middle East conflict, a BOJ official told a briefing.

An index gauging sentiment among big non-manufacturers was steady at +36, exceeding a median market forecast for +33, due to rising profits from price hikes and inbound tourism.

"The Tankan survey showed that firms are shrugging off the energy shock caused by the Iran war, which should encourage the BOJ to hike rates at this month's meeting," said Marcel Thieliant, head of Asia-Pacific at Capital Economics.

Big firms expect to increase capital expenditure by 3.3% in fiscal 2026, compared with a median market forecast for a 3.0% gain, the survey showed.

The survey was conducted between February 26 and March 31 with roughly 70% of firms responding by March 12, nearly two weeks after the U.S.-Israel attacks on Iran on February 28.

In a sign they were bracing for more pain from the conflict, both manufacturers and non-manufacturers see business conditions worsen in the next three months, the survey showed.

While a weak yen and slow wage growth have padded margins, corporate profits and sentiment will eventually worsen due to weak exports and domestic demand, said Stefan Angrick, head of Japan and Frontier markets Economics at Moody's Analytics.

"The BOJ will take comfort from a solid Tankan, but without the economy finding better footing overall, it will be difficult to make the case for more aggressive rate hikes," he said.

INFLATION EXPECTATIONS HEIGHTEN

Markets have been rattled since the Iran war effectively shut the Strait of Hormuz, a chokepoint for about a fifth of global oil and gas flows, driving up crude oil prices.

The conflict has put the BOJ in a tight spot as it looks at raising still-low borrowing costs to cope with inflation that has exceeded its 2% target for nearly four years.

Even as they decided to keep rates steady, BOJ policymakers debated in March heightening inflationary risks that some saw could warrant steady or faster-than-expected rate hikes.

In a sign of heightening inflation expectations, companies expect inflation to hit 2.6% one year from now, the tankan showed, up from 2.4% in December. They expect inflation of 2.5% three years from now, as well as five years from now, which were both the highest projections on record, the survey showed.

The findings come on the heels of a BOJ report showing how Japan's underlying inflation rate may face stronger upward pressure from rising oil prices and yen falls than in the past.

The BOJ ended a decade-long, massive stimulus programme in 2024 and raised rates including in December, when it hiked rates to a 30-year high of 0.75%, on the view that Japan was making progress in durably achieving its 2% inflation target.

With the weak yen adding to inflationary pressures, markets are pricing in roughly a 70% chance of another hike in April.

(Reporting by Leika Kihara; Editing by Thomas Derpinghaus and Sam Holmes)