Japan’s corporate sentiment remained broadly stable in the Bank of Japan’s December Tankan survey, with large manufacturers’ sentiment holding steady and business conditions across the services sector remaining elevated, even as profit expectations weakened and labour shortages persisted.
The headline large manufacturers’ index came in at +15, matching both the previous quarter and market expectations. This is the highest since December 2021.
Sentiment is expected to remain unchanged in March, outperforming consensus forecasts. Large non-manufacturers eased slightly to +34, just below expectations, with a further moderation to +28 projected for March.
Smaller firms showed modest improvement, with small manufacturers rising to +6, beating forecasts, while small non-manufacturers edged up to +15, the highest sonce March 2019. Capital expenditure plans were resilient, with large firms forecasting FY2025/26 capex growth of 12.6%, above expectations, led by manufacturers.
However, profit expectations softened. Large manufacturers see recurring profits falling 7.8% in FY2025/26, weighing on the overall earnings outlook despite solid investment intentions.
Corporate inflation expectations were unchanged, with firms continuing to expect consumer prices to rise 2.4% over one-, three- and five-year horizons. Labour market conditions remained tight, with the employment diffusion index at -38, underscoring persistent worker shortages.
Japanese firms forecast the dollar averaging around ¥147 in FY2025/26, pointing to expectations of continued yen weakness.
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The survey supports the BOJ’s gradual normalisation narrative, with stable sentiment, anchored inflation expectations and strong capex offset by weaker profits and lingering yen sensitivity.
