Japan’s business sentiment beats consensus despite tariffs

Confidence among Japan’s large manufacturers edged up in June, reflecting resilience in the face of the escalating US tariff campaign and backing the case for another Bank of Japan interest rate hike in the coming months.

The sentiment index for the country’s major manufacturers climbed to 13 from 12 in March, according to the BOJ’s quarterly Tankan report on Tuesday.

The gauge for the large non-manufacturers fell slightly to 34 from 35, staying near a record high. Economists had expected readings of 10 for manufacturers and 34 for the services sector.

A positive figure indicates that optimists outnumber pessimists. The outlook broadly remained unchanged for large manufacturers and non-manufacturers. Sentiment also stayed broadly the same for smaller firms.

The better-than-expected reading for sentiment at large manufacturers is likely to give BOJ Governor Kazuo Ueda confidence he can keep the debate around a potential rate hike on the agenda when his board next meets at the end of the month. The main gauge has now stayed positive for more than four years, supporting the central bank’s contention that the economy continues to recover with pockets of weakness.

Business sentiment is a key indicator for authorities seeking to assess whether wage momentum may be sustained. The bank warned in its latest policy statement that growth may moderate as trade and other policies weigh on corporate profits. If companies see their margins squeezed, they may have to slow the pace of pay increases.

In the last two years, large companies have vowed during annual wage negotiations to extend wage increases of 5% or more, the biggest gains in more than three decades. Those gains fuelled hopes of a virtuous economic cycle featuring increased spending that spurs demand-led inflation.