By Max Sato
(MaceNews) – The Bank of Japan’s quarterly Tankan business survey is forecast to show confidence among manufacturers slipped in the March quarter in the face of stiff tariffs on U.S. imports of metals and vehicles as well as President Trump’s plans to slap “reciprocal tariffs” on imports from global trading partners.
China’s struggling recovery from its property market problems is also seen putting a damper on corporate sentiment overall. Sentiment among non-manufacturers appears to have edged up or being flat. The tourism industry is benefiting from an influx of foreign visitors amid the weak yen while rising costs of living are hurting consumer spending.
The Tankan diffusion index showing sentiment among major manufacturers is forecast at 12, down from 14 in December. The index measuring sentiment among major non-manufacturers is seen at 34, easing from 33 in the previous poll.
The index for smaller manufacturers is forecast to dip to -1 from +1 while that for their non-manufacturers is seen unchanged at 16.
The BOJ will release the results of its Tankan business survey conducted from late February through late March at 0850 JST on Tuesday, April 1 (1950 EDT/2350 GMT Sunday, March 31).
Major firms are expected to project their plans for business investment in equipment would rise a combined 9.1% on the year in fiscal 2024 ending in March 2025, down from +11.3% in the December survey and indicating firms are becoming more cautious in the face of a global trade war. Capex plans are generally supported by demand for automation amid labor shortages as well as government-led digital transformation and emission control.
Smaller firms are expected to maintain their combined capital spending plans at a 4.7% increase after lifting it to +4.0% in December from +2.6% in September. Those firms tend to have conservative plans at the start of each fiscal year and revise them up later.
Looking ahead, major firms are forecast by economists to present a combined 2.6% rise in capex for fiscal 2025 ending in March 2026 (their first estimate) while smaller firms are expected to start their plans for the incoming fiscal year with a 3.9% drop.
BOJ policymakers will analyze this and other pieces of data ahead of their next policy meeting on April 30-May 1, when the board will update their medium-term growth and inflation forecasts.
At its latest meeting on March 18-19, the BOJ’s nine-member board voted unanimously to maintain the target for overnight interest rate at 0.5%, as widely expected, after voting 8 to 1 to raise the policy rate by another 25 basis points to 0.5% in January in a third rate hike during the current normalization process that began in March 2024.
The next rate hike is expected to be in July or September, depending on economic data and the impact of geopolitical risks. Members are closely monitoring whether expected high wage increases by major firms will spread to smaller firms in fiscal 2025 starting on April 1 at a time when real wages are falling, which could hurt consumption further and generate deflationary pressures.
The board continues to expect inflation to be anchored around its 2% target by early 2026, saying, “In the second half of the projection period (from fiscal 2024 through fiscal 2026 ending March 2027), underlying CPI inflation is likely to be at a level that is generally consistent with the price stability target.”
Governor Kazuo Ueda told a post-meeting news conference on March 19 that he would “keep in mind” heightened upside risks to inflation warned about by some BOJ board members at the latest two-day meeting among other things when he formulates monetary policy.
“I think the uncertainties over global growth are increasing but if you take a look at the domestic wage negotiations, the positive cycle is growing,” Ueda said, noting that wage hikes proposed by large firms are a little higher than expected.
But the governor also said the BOJ would not raise its policy rate just to contain a spike in the prices of rice in the aftermath of acute domestic supply shortages because “that would cool off consumption.”
Ueda warned that the underlying inflation is estimated to be still under the bank’s 2% price stability target. “To put it simply, the price increase in service prices is not so strong,” he said, underscoring the slow progress in lifting regulated wages as well as underpaid workers at restaurants and tourism.
The BOJ is believed to be on course for two more 25 basis point rate hikes that would take the overnight interest rate target to 1% by late 2025 or early 2026 as part of its gradual normalization process after more than a decade of large-scale easing.
The BOJ under Governor Ueda, who took office in April 2023, shifted gear in March 2024 with its first rate hike in 17 years and an end to the seven-year-old yield curve control framework, following a decade of large monetary easing aimed at reflating the economy. The board stood pat in December, October and September after voting 7 to 2 in July to hike the rate to 0.25% from a range of 0% to 0.1%.