Japan's manufacturers show rising sentiment amid tariff concerns

Japan has seen a notable improvement in sentiment among its large manufacturers, as per the latest Bank of Japan survey known as the tankan. This survey, conducted quarterly, revealed that the sentiment index for major manufacturers rose by one point to plus 14 from the previous figure in June, indicating a positive outlook for the second consecutive quarter. This index is calculated by subtracting the number of companies expressing pessimism about the business climate from those showing optimism. In March, the index had dropped to plus 12, marking a decline for the first time in a year. The steady recovery in sentiment reflects a combination of factors, primarily a recent tariff agreement with the U.S., which alleviated some uncertainties for Japanese exporters. The agreement included a 15% tariff on most goods exported to the U.S., compared to a prior 25% rate on auto imports, offering some relief to Japanese automakers and boosting confidence in the manufacturing sector. Despite positive sentiment in the manufacturing sector, concerns regarding the impact of higher tariffs on corporate profits, wages, and investments persist within the broader economy. Although analysts have pointed out that the toll from these tariffs has been relatively limited thus far, the ongoing constraints on consumer spending and business investment cannot be overlooked. Alongside these developments, Japan's tourism sector continues to thrive, with a rising number of international visitors that has not yet peaked, further contributing to economic optimism. The findings of the survey could influence the Bank of Japan's pending decision on interest rates, which have remained near zero for several years in an effort to stimulate consumer spending and moderate business activity. With inflation currently above the central bank's target range of around 2%, the latest outlook shows an average inflation expectation remaining steady at 2.4% for the year ahead. Given this context, analysts are anticipating that the Bank of Japan may soon raise its benchmark interest rate. However, uncertainty remains over whether this change will occur at the next scheduled meeting or at a later date, as previous adjustments to the benchmark rate have shown only modest progress. Nevertheless, continuous improvements in sentiment among large manufacturers could create favorable conditions for such a policy shift in the near future, especially if economic signs continue to reflect growth and resilience amidst ongoing global challenges.