Japan’s Q1 Tankan survey showed business sentiment holding firm, with the Large Manufacturing Index rising from 16 to 17, beating expectations of 16. The Non-Manufacturing Index held steady at 36, also above forecasts of 33. The data points to stable domestic conditions even as external uncertainties persist, and strengthens the case for further normalization by the BoJ.
Capital expenditure plans added to the constructive tone, with large firms expecting to increase spending by 3.3% in fiscal 2026, slightly above the 3.0% market forecast.
The survey highlighted strong demand linked to artificial intelligence and semiconductors, reinforcing the view that Japan’s corporate sector continues to benefit from structural tech investment trends. However, the Middle East conflict weighed on petroleum, coal, and chemical sectors.
More importantly for the BoJ, inflation expectations rose notably. Firms now see inflation at 2.6% one year ahead, up from 2.4%. Projections for three and five years both climbed to 2.5%, the highest on record. This sustained rise reinforces the narrative of a gradual shift in Japan’s inflation dynamics, supporting expectations that the BoJ will continue its path toward policy normalization.
