Japanese business sentiment remains solid, supporting April BoJ hike

Sentiment among large Japanese manufacturers rose to 17 in the first quarter (vs revised 16 in 4Q25 survey, market consensus), while non-manufacturers’ sentiment index stayed flat at 36 (vs revised 36 in 4Q25, 33 market consensus). The outlook indices for manufacturing and non-manufacturing declined relative to the fourth quarter of 2025 but still beat market consensus. The outlook for general machinery and electrical machinery improved, while expectations worsened for iron and steel, motor vehicles, and basic materials. We believe the robust semiconductor cycle is driving positive sentiment in the overall manufacturing sector. Yet sentiment declined in sectors more closely tied to commodities. We believe that stronger-than-expected Tankan survey results indicate that business confidence hasn’t yet turned significantly negative.

The Manufacturing PMI delivered a similar story. It was revised up to 51.6 from its flash 51.4, even though this is below February’s 53. It has remained in expansion for three consecutive months. However, output and new orders declined, making the outlook cloudy.

Today's Tankan showed that the recent rise in oil prices may raise inflationary pressure in the future. The output price index indicates higher prices are expected in both the short and medium terms. The Bank of Japan will pay more attention to the price component. This is in line with the BoJ's view that underlying inflation is approaching 2%, supporting further policy normalisation. We expect the BoJ to deliver a 25 bp hike in April.