Japan business mood hits 4-year high, keeps BOJ rate-hike view alive

TOKYO — Business sentiment among large Japanese manufacturers climbed to a four-year high in the three months to December, according to a closely watched survey released Monday, reinforcing market expectations that the central bank will raise interest rates this week.

However, companies expect conditions to deteriorate in the next three months as they worry about the impact of higher U.S. tariffs and weak domestic consumption, underscoring uncertainty over how far the Bank of Japan (BOJ) can eventually push borrowing costs.

The headline index measuring business confidence among big manufacturers stood at plus 15 in December, up from plus 14 in September and in line with the median market forecast, the BOJ’s quarterly tankan survey showed. This marked the third straight quarter of improvement and the strongest reading since December 2021, suggesting firms are, for now, weathering the effects of higher U.S. tariffs.

Sentiment among big non-manufacturers was unchanged at plus 34 in December, roughly matching market expectations for a reading of plus 35.

“Overall, the tankan supports the dominant market view that the BOJ will raise rates in December. Unless a major shock hits the economy or financial markets, a hike is likely,” said Masato Koike, senior economist at Sompo Institute Plus.

Large firms expect to increase capital expenditure by 12.6% in the current fiscal year ending in March 2026, compared with a median market forecast of a 12% rise.

Sources have told Reuters that the BOJ is likely to raise its short-term policy rate to 0.75% from 0.5% at its December 18–19 meeting, as concerns ease that U.S. President Donald Trump’s tariffs will severely damage Japan’s export-reliant economy.

The survey also showed that big firms reported higher sales prices in the fourth quarter and expect prices to continue rising in the coming months, indicating that solid demand is allowing companies to pass on higher costs to consumers.

Despite the improved mood, companies projected business conditions to worsen three months ahead. While reduced uncertainty over U.S. trade policy helped lift sentiment, many firms remain concerned about labor shortages and the drag on consumption from rising prices, a BOJ official said during a briefing.

An index measuring job conditions showed that firms viewed the labor market as the tightest since 1991, when Japan was in the midst of an asset-price bubble. This highlights how labor shortages could constrain growth in an economy facing a shrinking working-age population.

Analysts, however, see the tight labor market as supportive of steady wage growth, a key condition the BOJ has set for continuing to raise interest rates.

“With firms reporting acute labor shortages, the board can be confident that the virtuous cycle of rising wages and rising prices will remain intact,” said Abhijit Surya, senior Asia-Pacific economist at Capital Economics, who expects the BOJ to raise its policy rate to 1.75% by 2027.

Japan’s economy contracted in the third quarter as exports weakened due to U.S. tariffs, but analysts expect growth to rebound in the current quarter as exports and factory output show signs of recovery.

With inflation running above the BOJ’s 2% target for more than three years, a growing number of policymakers have signaled readiness to support a rate hike to avoid falling behind the curve in addressing inflation risks.

Companies expect inflation to average 2.4% one, three, and five years ahead, according to the tankan, suggesting that corporate inflation expectations are becoming anchored near the BOJ’s target. -Reporting by Leika Kihara; Editing by Sam Holmes and Shri Navaratnam/Reuters