Japan's biggest factories are feeling more confident than they have since 2018. But the yen is trading at its weakest against the dollar since 1986, and companies are planning a wave of price increases. These forces could push the central bank to keep raising interest rates.
The Tankan survey is a quarterly report from the Bank of Japan. It asks companies how they view business conditions. An index above zero means optimists outnumber pessimists.
Several factors are driving this mood. A weak yen helps exporters by making their goods cheaper overseas. Global demand for artificial intelligence is also boosting orders. And last month the Nikkei 225 stock index hit a record high, giving businesses more confidence.
Japan has also avoided severe supply chain problems by holding large oil stockpiles and finding alternative raw material sources. That stability supports production. Overall, the corporate sector looks resilient.
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The Tankan survey has long been a bellwether for Japan's economic trajectory. Readings above zero have been common since the early 2010s as Abenomics policies sought to revive growth, but the recent jump to 22 marks a notable recovery from pandemic-era lows. Combined with rising inflation expectations, the data suggests Japan's economy is transitioning from decades of deflation to a more normalized environment - though a weak yen still squeezes household budgets.
The same survey shows that companies expect higher inflation down the road.
Why are expectations rising? During the period when the survey was conducted, oil prices climbed to unusually high levels after conflict erupted in Iran. Higher energy costs feed into many goods.
Consumers will feel the pinch soon. A Teikoku Databank report released on Tuesday showed that Japan's leading food and beverage firms are set to raise prices on 2,566 products this month, the highest number of price hikes for that month since 2023.
The Bank of Japan already raised interest rates last month. With the corporate sector strong and inflation risks pointing up, the central bank's commitment to further rate hikes is likely to become more certain.
Currency traders are watching closely. The yen slid to a 38-year low against the dollar earlier this week, prompting traders to stay vigilant for possible intervention.
The weak yen creates a split effect: while it boosts profits for exporters, it also drives up import costs, especially for energy and food. This pressure on household budgets is a key concern for policymakers. The Bank of Japan's next moves will be closely watched as it balances the need to support growth with the risk of stoking further inflation.
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