Tokyo — Business sentiment among Japanese firms improved in the three months to March while corporate inflation expectations rose to record levels, a closely watched survey showed on Wednesday, strengthening the case for a near-term interest rate hike by the Bank of Japan, even as escalating fuel costs linked to the Iran conflict darken the economic outlook.

The central bank’s quarterly “tankan” survey indicated that large manufacturers’ sentiment index rose to +17 in March, slightly above market forecasts of +16 and up from +16 in December, marking its highest level since December 2021.

The improvement extended a fourth consecutive quarter of gains, suggesting that parts of Japan’s industrial sector have continued to recover despite mounting global uncertainties.

Sentiment among large non-manufacturers remained robust, with the index holding steady at +36, surpassing a median market forecast of +33. The strength in the services sector was supported by rising profits from price increases and a continued recovery in inbound tourism, according to the survey data.

A Bank of Japan official said resilient demand for artificial intelligence-related semiconductors and easing uncertainty over U.S. trade policy helped offset pressures from higher input costs and geopolitical tensions in the Middle East.

At the same time, the survey highlighted growing inflationary pressures within the corporate sector. Companies reported rising expectations for future price increases, reflecting the impact of higher fuel and raw material costs.

Analysts said this trend could provide additional justification for the central bank to move toward policy normalisation after years of ultra-loose monetary settings.Mari Iwashita, executive rates strategist at Nomura Securities, said the survey underscored mounting inflation risks driven by external shocks.

She noted that companies facing surging energy costs may increasingly pass those expenses on to consumers, reinforcing upward pressure on prices.The data comes at a critical juncture for the Bank of Japan, which is weighing whether to raise interest rates as early as this month.

Market participants have been closely monitoring the tankan survey as a key gauge of corporate sentiment and investment plans.Despite the relatively upbeat current conditions, the survey revealed growing caution among firms about the near-term outlook.

Both manufacturers and non-manufacturers expect business conditions to deteriorate over the next three months, reflecting concerns about the economic fallout from the Iran conflict and its impact on energy markets.

The ongoing conflict has driven up global fuel costs, increasing operational expenses for Japanese companies that rely heavily on imported energy. The resulting squeeze on margins is expected to weigh on profitability, particularly for industries with limited pricing power.

Marcel Thieliant, head of Asia-Pacific at Capital Economics, said the strength of the survey could still encourage policymakers to act. He noted that firms appeared to be absorbing the energy shock for now, suggesting that underlying economic conditions remain stable enough to support a rate hike in the near term.

Capital expenditure plans among large firms also pointed to cautious optimism. Companies expect to increase investment by 3.3% in the fiscal year 2026, exceeding a median market forecast of a 3.0% rise.

The planned increase suggests that firms are continuing to invest in growth despite heightened uncertainty.The survey period, which ran from February 26 to March 31, captured responses from roughly 70% of firms by March 12, shortly after the escalation of hostilities involving the U.S.-Israel attacks on Iran on February 28.

This timing indicates that early assessments of the conflict’s economic impact are already being reflected in corporate sentiment.Economists cautioned that the positive momentum seen in the survey may not be sustained if external conditions worsen.

Stefan Angrick said that while a weak yen and subdued wage growth have supported corporate margins, broader economic challenges remain.He noted that export growth could weaken amid slowing global demand, while domestic consumption may remain constrained by modest income gains.

Over time, these factors could weigh on corporate profits and sentiment, complicating the central bank’s policy decisions.The survey underscores the delicate balance facing policymakers as they navigate between emerging inflationary pressures and risks to economic growth.

While improving sentiment and rising prices strengthen the case for tightening monetary policy, the uncertain global environment, particularly developments in the Middle East, continues to pose significant challenges for Japan’s export-driven economy.

As artificial intelligence drives record investment and productivity gains, investors see a new phase of growth emerging in 2026, one that may reshape inflation dynamics and redefine long-term market resilience.

Global financial markets have entered 2026 with strong momentum, powered by optimism around artificial intelligence and expectations of sustained economic expansion. Equity markets across the United States, Europe, and Asia continue to reflect confidence in innovation-led growth and corporate earnings strength.

At the center of this optimism is the rapid adoption of AI across industries, from finance and healthcare to manufacturing and logistics. Investors view this transformation as a structural shift that could lift productivity, create new revenue streams, and support long-term economic expansion.

While inflation has moderated from previous peaks, many market participants believe the current environment reflects a healthy rebalancing rather than a return to instability. The combination of technological investment and government stimulus is increasingly seen as a catalyst for durable growth.

Large-scale investment in data centers, cloud infrastructure, and advanced computing capacity is playing a key role in this transition. These projects are expanding global digital infrastructure while generating demand across energy, construction, semiconductors, and skilled labor markets.

Rather than being viewed solely as a cost pressure, this investment cycle is also supporting employment and industrial activity. Stronger labor markets and higher capital expenditure are contributing to broader economic confidence across major economies.

Central banks are closely monitoring these developments as they assess the appropriate balance between growth and price stability. Many investors believe policymakers now have more flexibility, supported by better tools, clearer communication, and lessons learned from recent inflation cycles.

Market participants also note that AI-driven efficiency gains could offset some inflationary pressures over time. Automation, predictive analytics, and smarter supply chains have the potential to lower operating costs and improve output across sectors.

Equity investors remain particularly constructive on technology leaders, viewing them as both drivers and beneficiaries of the new economic landscape. Strong balance sheets and pricing power provide a cushion even if financing conditions become less accommodative.

Bond markets, too, reflect confidence that growth and inflation can coexist within manageable ranges. Expectations of gradual policy normalization rather than abrupt tightening have helped support investor sentiment across asset classes.

Government spending programs in the United States, Europe, and parts of Asia are further reinforcing demand. These initiatives, focused on digital infrastructure, clean energy, and industrial resilience, align closely with private-sector AI investment.

From a strategic perspective, many investors see 2026 as a year of recalibration rather than disruption. Inflation dynamics are evolving alongside innovation, suggesting a more complex but potentially more balanced economic environment.

The key theme emerging is adaptation. Markets are learning to price growth driven by technology, capital investment, and productivity rather than short-term stimulus alone. This shift may lead to more sustainable returns over the long run.

As artificial intelligence becomes embedded across the global economy, its influence on inflation, growth, and investment strategy will remain central. For investors, this represents not just a risk to monitor, but an opportunity to rethink portfolios for a technology-shaped future.