Japan business mood improves despite tariff risks, BOJ tankan shows

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TOKYO :Business sentiment among Japan's big manufacturers unexpectedly improved in the three months to June, a central bank survey showed on Tuesday, a sign companies are still awaiting clarity on the potential hit from steep U.S. tariffs.

Sentiment among big non-manufacturers worsened slightly, the closely watched "tankan" survey showed, as the rising cost of living squeezes consumption.

Manufacturers and service-sector firms expect business conditions to worsen three months ahead, the Bank of Japan's quarterly survey showed.

The headline index measuring big manufacturers' business confidence stood at +13 in June, up from +12 in March and beating a median market forecast for a reading of +10.

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An index gauging big non-manufacturers' sentiment fell to +34 from +35 in March, matching median market forecasts.

The survey will be among factors the BOJ will scrutinise at its next policy meeting on July 30-31, when the board will also conduct a quarterly review of its growth and price forecasts.

Japan's economy, which shrank an annualised 0.2 per cent in the first quarter due to weak consumption, is bracing for further pain as U.S. tariffs hurt exports.

Japan has failed to convince U.S. President Donald Trump's administration to scrap a 25 per cent tariff on Japanese cars and a 24 per cent reciprocal tariff on other Japanese imports paused until July 9.

Uncertainty over Trump's trade policy may also prod firms to delay or scrap capital expenditure plans, analysts say.

While exports have already slumped, corporate activity is holding up, at least for now. Big companies expect to increase capital expenditure by 11.5 per cent in the current fiscal year ending in March 2026, up from a 3.1 per cent gain projected in March and above a market forecast for a 10.0 per cent rise.

Many analysts expect the damage from U.S. tariffs on exports and output to intensify later this year, and complicate the BOJ's decision on when to resume interest rate hikes.

The BOJ ended a decade-long, massive stimulus programme last year and in January raised short-term interest rates to 0.5 per cent on the view Japan was on the cusp of durably meeting its 2 per cent inflation target.

While the central bank has signalled readiness to raise rates further, the economic impact of higher U.S. tariffs forced it to cut its growth forecasts in May.

Further muddling the policy outlook, consumer inflation has exceeded the BOJ's 2 per cent target for more than three years as companies continue to pass on rising raw material costs.

A slight majority of economists in a Reuters poll expect the BOJ's next 25-basis-point increase to come in early 2026.

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