TOKYO: Business sentiment among major Japanese manufacturers fell to its lowest level in a year during the first quarter of 2025, reflecting concerns over escalating trade tensions and their impact on the export-driven economy, according to a central bank survey released on Tuesday.
While large manufacturers faced a downturn, the mood among major non-manufacturers improved to its highest level since 1991, supported by strong inbound tourism revenue and the ability to pass on higher costs through price hikes.
However, both manufacturing and service-sector firms anticipate tougher conditions in the coming months, with concerns over soft global demand, rising costs, and uncertainty surrounding U.S. tariffs, as revealed in the Bank of Japan’s (BOJ) Tankan survey.
Trade Tensions Weigh on Business Outlook
The survey was conducted before U.S. President Donald Trump’s recent announcement of new tariffs on auto imports, underscoring how external risks are complicating Japan’s economic outlook.
“Companies have not fully factored in the impact of U.S. tariffs, which is creating uncertainty, though their profits haven’t been directly affected yet,” said Kazutaka Maeda, an economist at Meiji Yasuda Research Institute.
Despite the decline in sentiment, strong wage growth and stable business investment suggest the BOJ is unlikely to shift its stance on gradually raising interest rates, Maeda added.
Key Survey Findings
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The business confidence index for major manufacturers dropped to +12 in March, down from +14 in December, marking the first decline in four quarters.
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Sentiment among steel and machinery manufacturers weakened due to sluggish overseas demand, rising material costs, and tariff-related concerns.
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Non-manufacturers’ confidence rose to +35, the highest level since Japan’s asset-inflation bubble in 1991, exceeding the market forecast of +33.
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Large companies plan to increase capital expenditure by 3.1% in the current fiscal year, surpassing the 2.9% forecast.
Interest Rate Hike in May?
The Tankan survey highlighted rising inflationary pressures, with companies expecting prices to increase by 2.4% over the next three years, the highest projection on record.
“With inflation likely to exceed the BOJ’s forecasts, there is a strong case for an interest rate hike at its next meeting in May,” said Marcel Thieliant, head of Asia-Pacific at Capital Economics.
The BOJ, which raised interest rates to 0.5% in January, is now balancing inflation concerns against potential economic risks from Trump’s tariff policies.
Governor Kazuo Ueda has signaled that further rate hikes will depend on continued wage growth and consumer spending strength. However, fears of a trade-driven economic slowdown could lead policymakers to take a more cautious approach.
A Reuters poll indicates that many analysts expect the BOJ’s next rate hike to occur in the third quarter of 2025, possibly in July.
As Japan navigates global trade uncertainties and inflationary pressures, the BOJ’s upcoming May 1 policy meeting will be closely watched for signs of its next move.
