The BOJ’s quarterly “tankan” survey indicated the headline index for big manufacturers’ business confidence stood at +15 in December, up from +14 in September and in line with market forecasts. This marks the third consecutive quarter of improvement and represents the highest reading since December 2021, signaling that firms are currently weathering the impact of higher U.S. tariffs.
At the same time, the survey highlighted lingering uncertainty. Firms expect conditions to deteriorate over the next three months as they grapple with potential trade frictions and softer domestic consumption. The tankan also showed sentiment among big non-manufacturers at +34 in December, unchanged from September and close to expectations.
“Overall, the tankan backs up dominant market views that the BOJ will raise rates in December. Unless a major shock hits the economy or markets, a hike is likely,” said Masato Koike, senior economist at Sompo Institute Plus.
Investment and Pricing Outlook
Big firms indicated plans to increase capital expenditure by 12.6% in the current fiscal year ending in March 2026, slightly above the median market forecast of 12%. The tankan also revealed that firms saw sales prices rise in the fourth quarter and expect further price increases in the coming months, reflecting solid demand that allows companies to pass on higher costs to consumers.
Market sources have suggested the BOJ is likely to lift its short-term policy rate from 0.5% to 0.75% at its December 18–19 meeting, as concerns that U.S. tariffs could severely disrupt the export-driven economy ease.
Labour Shortages and Wage Pressures
Despite a generally positive business mood, companies expressed caution about future conditions, citing labour shortages and the dampening effect of higher prices on consumption. The tankan showed job conditions at their tightest since 1991, during Japan’s asset-inflated bubble era, highlighting potential constraints on economic growth in a country facing a shrinking working-age population.
Analysts, however, view the tight labour market as a support for sustained wage growth, a critical condition the BOJ has identified for continuing interest rate hikes. “With firms reporting acute labour shortages, the Board can rest assured that the virtuous cycle between higher wages and higher prices will remain intact,” said Abhijit Surya, senior APAC economist at Capital Economics, who forecasts the BOJ’s policy rate could reach 1.75% by 2027.
Economic Outlook
Japan’s economy contracted in the third quarter due to declining exports amid U.S. tariffs. Yet analysts expect a rebound in the current quarter, supported by recovering factory output and improving exports. With inflation exceeding the BOJ’s 2% target for over three years, an increasing number of board members have signaled readiness to raise rates to avoid lagging behind in addressing the risk of persistently high inflation.
Corporate inflation expectations appear to be stabilizing around the BOJ’s target, with companies projecting 2.4% inflation one, three, and five years ahead, according to the tankan.
The survey underscores a delicate balance for policymakers: while manufacturers’ confidence is strong, ongoing uncertainties in trade, consumption, and labour supply mean the BOJ must carefully calibrate monetary policy to sustain growth while keeping inflation in check.
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