By Leika Kihara
TOKYO (Reuters) – Business sentiment among big Japanese manufacturers worsened in the three months to March, a central bank survey showed on Tuesday, a sign escalating trade tensions were already taking a toll on the export-reliant economy.
The survey, compiled before U.S. President Donald Trump’s announcement last week of a plan to impose tariffs on auto imports, highlights how external headwinds are complicating the Bank of Japan’s decision around the timing of further interest rate hikes.
The outcome will be among key factors the BOJ will scrutinise at its next policy-setting meeting on May 1, when it will also release fresh quarterly growth and price forecasts.
The headline index measuring big manufacturers’ business confidence stood at +12 in March, down from +14 in December and matching a median market forecast, the BOJ’s closely watched “tankan” survey showed.
An index gauging big manufacturers’ sentiment increased to +35 from +33 in December, compared with a median market forecast for a reading of +33.
Big companies expect to increase capital expenditure by 3.1% in the current fiscal year ending in March 2026, compared with a median market forecast for a 2.9% rise, the survey showed. It was slower than a 8.7% increase for the previous fiscal year that ended in March.
Companies expect inflation to stay above the BOJ’s 2% target one, three and five years ahead, the tankan showed, suggesting that conditions for raising Japan’s still-low interest rates were falling into place.
The tankan was compiled in a period between Feb. 26 and March 31.
Companies surveyed likely took into account Trump’s decision in February to raise tariffs on imports of steel and aluminum to a flat 25%, a move that was designed to help U.S. industry while contributing to an escalating trade war. He also has pledged to announce reciprocal tariffs on Wednesday targeting all countries.
The BOJ exited a decade-long, radical stimulus programme last year and raised short-term interest rates to 0.5% in January on the view Japan was on the cusp of sustainably hitting its inflation target.
Governor Kazuo Ueda has said the BOJ will keep pushing up borrowing costs if continued wage gains underpin consumption and allow firms to raise prices, thereby maintaining inflation stably around its target.
The BOJ is caught in a dilemma. Steady rises in food prices have kept inflation above its 2% target for nearly three years which, coupled with prospects of sustained wage gains, heighten the case for a near-term rate hike.
But uncertainty over Trump’s tariff policy has jolted markets and stoked fears of a downturn in Japan’s fragile economy, which may warrant going slow on future rate hikes.
A Reuters poll showed many analysts expect the BOJ’s next rate hike to come in the third quarter, most likely in July.
The tankan’s sentiment diffusion indexes are derived by subtracting the number of respondents who say conditions are poor from those who say they are good. A positive reading means optimists outnumber pessimists.
(Reporting by Leika Kihara; Editing by Kim Coghill and Shri Navaratnam)
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