The Japanese yen has begun to recover from initial post-data weakness following the release of the Bank of Japan’s December Tankan survey and subsequent comments from a BOJ official, as markets increasingly lean toward the possibility of a policy rate hike later this week.
The Tankan survey showed corporate sentiment holding up better than expected, with large manufacturers’ confidence steady at +15 and smaller firms outperforming forecasts. Capital expenditure plans remained firm, inflation expectations stayed anchored at 2.4% across one-, three- and five-year horizons, and labour shortages persisted, all elements consistent with the BOJ’s narrative that underlying price pressures remain intact.
Follow-up comments from a BOJ official added further colour. Firms cited easing uncertainty around U.S. trade policy, a smaller-than-feared impact from U.S. tariffs, improved cost pass-through and robust demand linked to artificial intelligence and semiconductor investment as factors supporting business conditions. While companies also flagged rising labour costs, worker shortages and weaker consumption due to higher prices, the balance of commentary suggested resilience rather than deterioration in corporate fundamentals.
Taken together, the data and responses appear to strengthen the case for another step toward policy normalisation at the BOJ’s December 18/19 meeting. The combination of stable sentiment, firm capex intentions and anchored inflation expectations supports the view that Japan’s economy can absorb modestly tighter policy, even as profit growth moderates.
In currency markets, the initial reaction was counterintuitive. The yen weakened following the Tankan release, with USD/JPY briefly climbing above 155.95. However, as markets digested the details and the BOJ commentary, the yen began to strengthen, with USD/JPY pulling back below 155.60.
The price action suggests a market still cautious but increasingly sensitive to any signal that the BOJ may move sooner rather than later. With positioning heavily skewed toward yen weakness, even incremental confirmation of a December hike risks triggering further short-covering.
The evolving BoJ rate hike narrative, reinforced by Tankan data and corporate feedback, is shifting expectations. If the BOJ does move this week, it would mark another meaningful step away from ultra-loose policy and could provide further support for the yen, particularly if accompanied by guidance that policy normalisation will continue gradually into 2026.
