01-04-2025
Japanese businesses maintain optimism ahead of looming tariff storm
Large Japanese businesses remained optimistic in the first quarter even as the United States threatened heavy tariffs on products made by these companies.
In the Bank of Japan's tankan survey, released on Tuesday, the headline index for big manufacturers was 12, which indicates confidence in the business outlook. The number was down from 14 in December — and was the first drop since the first quarter of 2024 — but some analysts put a positive spin on the news.
"Because of the U.S. tariff hikes and the slowdown in overseas economies, the reading was expected to drop, particularly in the materials sector," said Shunpei Fujita, an economist at Mitsubishi UFJ Research & Consulting.
Strength was reported in some subcategories.
For automakers, sentiment improved to 13 from 8, and while the confidence score for the second quarter was a 9, Fujita said the industry appeared more optimistic than expected.
Most of the companies surveyed responded by March 12. At the time, it was still unclear whether Japan would be a target of the auto tariffs, so it is possible that the poll does not fully reflect the current situation.
The most recent tankan survey, conducted between Feb. 26 to March 31, polled nearly 9,000 companies.
In the tankan, participating companies are asked whether business conditions are 'favorable,' 'not so favorable" and 'unfavorable." Positive readings mean those answering favorable have outnumbered companies answering unfavorable.
As more than 99% of companies polled normally respond to the questionnaire, the data is considered to be of a very high quality and an accurate reflection of the situation on the ground.
In addition to 25% duties on steel and aluminum imports, U.S. President Donald Trump announced last week that 25% tariffs will be placed on all autos and auto parts imported into the United States from this Thursday.
He is also expected to announce a major round of reciprocal tariffs this week in what he is calling "Liberation Day."
'It's very possible that sentiment will deteriorate further among large manufacturing companies,' Fujita said.
Given that the impact of the tariffs remains unclear, Fujita added the results of the first-quarter survey will not factor greatly into the BOJ's decision-making process.
'I believe the bank's stance of cautiously raising rates due to the uncertainty surrounding the impact of the U.S. tariffs is unchanged," he said.
The BOJ kept rates unchanged in its policy meeting last month. In a Bloomberg survey last month, July was the top pick for the next rate increase, with 48% forecasting it as the most likely month for the bank to make the next move higher.
The tankan survey also showed that current business conditions for large nonmanufacturing companies improved to 35, the highest level since August 1991, compared to 33 in December, due to booming inbound tourism and companies being able to pass on increasing costs to customers.
"There have been various negative factors, such as labor shortages and rising interest rates, so the fact that reading has further improved is quite surprising," Fujita said.
