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.

Financial markets are showing signs of diminishing responsiveness to statements by Donald Trump on the conflict involving Iran, as investors weigh inconsistent signals against ongoing geopolitical and economic risks.

Earlier this week, a social media post by Trump describing talks with Iran as “very good and productive” triggered a broad market reaction. Oil prices dropped more than 10%, global equities rallied, the dollar weakened, bond yields fell and gold prices rose, illustrating the sensitivity of asset classes to perceived diplomatic progress.

However, subsequent remarks by Trump extending a deadline for potential U.S. military action against Iranian energy infrastructure to April 6 produced a more muted response. U.S. equities pared losses only slightly, while crude prices stabilised rather than reversing course.

By early Friday, Brent crude had resumed its upward trajectory, trading above $109 per barrel, and S&P futures were again in negative territory.

Market participants appear increasingly cautious amid conflicting narratives from Washington and Tehran. While Trump said Iran had requested a seven-day reprieve, reports citing mediators indicated no such request had been made. Iranian officials have also rejected a 15-point U.S. proposal aimed at ending the conflict.

At the same time, reports suggest the United States may deploy an additional 10,000 troops to the Gulf region, reinforcing concerns that the conflict could escalate even as diplomatic channels remain open.

This divergence has complicated pricing across asset classes, with investors struggling to assess the likelihood of either a near-term resolution or further escalation.

Since the conflict began on February 28, traditional safe-haven assets have not behaved uniformly. U.S. Treasury securities have weakened, reflecting inflation concerns and expectations of a more hawkish stance from the Federal Reserve, alongside signs of strain in government debt markets following a series of weak auctions.

Gold prices have also softened during the period, contrary to typical crisis-driven demand, prompting some investors to reassess assumptions about its role as a hedge during geopolitical shocks.Concerns are also building in private credit markets.

Firms including Ares Management and Apollo Global Management have restricted investor withdrawals from certain funds after an increase in redemption requests, signalling stress in less liquid segments of the financial system.

Despite volatility, some analysts are turning more constructive on U.S. equities, citing expectations of strong earnings growth. Several major banks have raised forecasts for the S&P 500, suggesting resilience in corporate performance even amid geopolitical uncertainty and concerns around artificial intelligence investment cycles.

In energy markets, the oil futures curve continues to indicate expectations of a relatively swift resolution to supply disruptions, despite estimates that as much as 20 million barrels per day could be affected by the conflict and related infrastructure damage.

The Strait of Hormuz, a critical global energy corridor, remains central to market dynamics. Investors appear to be pricing in a reopening of the route, although current conditions reflect ongoing disruption.U.S. gasoline prices are approaching $4 per gallon, indicating that domestic consumers are beginning to feel the impact of higher crude prices despite the country’s substantial energy production capacity.

Public sentiment has also weakened. A Reuters/Ipsos poll showed only 29% approval for Trump’s handling of the U.S. economy, marking the lowest level recorded for him on this measure.

The effects of the conflict are extending beyond crude markets. Natural gas markets may face more severe disruptions due to limited storage capacity, rigid supply chains and infrastructure constraints, particularly in Europe, which remains heavily dependent on gas imports.

This could force policymakers in Europe to reconsider elements of their climate transition strategies in the near term, as energy security concerns take precedence.

In contrast, the crisis may accelerate the adoption of alternative energy technologies in Asia, especially electric vehicles, where supply chains remain more flexible and policy support is strong.Geopolitical scheduling also reflects expectations around the conflict’s trajectory.

Trump has postponed a planned visit to China to meet Xi Jinping until mid-May, signalling an expectation that the situation may stabilise within weeks rather than days.

Markets remain highly sensitive to developments, but recent price action suggests that investors are placing greater emphasis on concrete developments rather than political messaging alone.

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.

American consumers displayed steady confidence in October, reflecting resilience in the face of ongoing economic and political challenges.

According to the University of Michigan’s latest Surveys of Consumers, the Consumer Sentiment Index held firm at 55.0, only a fraction below September’s reading of 55.1.

The report highlighted that Americans continue to demonstrate optimism about their financial futures, even as inflation and labor market adjustments shape the national outlook.

Despite a partial federal government shutdown and broader global economic uncertainties, consumers appear largely unfazed. Interviews with households showed that most Americans are adapting to shifting economic conditions, focusing on long-term financial stability rather than short-term disruptions.

The steady sentiment underscores the strength of consumer confidence—the backbone of the U.S. economy.

Resilience Amid Government Shutdown

The government shutdown, now entering its second week, has disrupted some federal operations, delayed air travel, and caused temporary furloughs among government contractors.

However, the University of Michigan report revealed that consumers’ perceptions of the economy remain largely intact.

“Consumers have not turned their back on the economy yet,” said Christopher Rupkey, chief economist at FWDBONDS. “It looks like consumers don’t mind that Washington has shut down.”

This resilience contrasts sharply with past shutdowns, during which consumer sentiment typically declined. Economists attribute the steadiness to strong household balance sheets, continued consumer spending, and optimism about future market stabilization.

Positive Outlook for Spending and Growth

Even as inflation remains a concern, consumer spending—the key driver of the U.S. economy—has continued at a steady pace. Economists predict that spending will remain solid through the third quarter, supported by stable employment levels, stock market gains, and consumer adaptability.

“Many consumers are feeling the strain of the weaker job market, but they are also sitting on a substantial wealth cushion,” noted Oren Klachkin, a financial market economist at Nationwide.

“The recent decline in the savings rate suggests consumers are willing to spend despite their various fears.”

This willingness to spend is a promising sign for retailers and service providers as the holiday season approaches. It also suggests that while Americans are aware of inflationary pressures, they maintain confidence in their ability to navigate the changing economic landscape.

Balanced Inflation Expectations

Inflation expectations remain stable, with consumers projecting a 4.6% rise over the next year—slightly down from 4.7% in September—and a steady 3.7% outlook over the next five years.

These figures indicate that while inflation is still on the minds of many households, long-term expectations are anchored, reflecting growing trust in economic policy measures to bring prices under control.

Experts say this moderation is key to maintaining market confidence and ensuring a sustainable recovery. The Federal Reserve’s focus on controlling inflation while supporting employment appears to be reassuring households that the economy remains on a positive trajectory.

Shifting Labor Market Dynamics

While some analysts have pointed to a softening labor market, others emphasize the current phase as a natural adjustment in a post-pandemic economy.

The rise of artificial intelligence and automation, coupled with evolving trade policies, is reshaping job demand across sectors. Yet, employment remains historically strong, and new industries—particularly in technology and green energy—are offering fresh opportunities for skilled workers.

Economists agree that consumer optimism, even amid labor market shifts, is a testament to America’s adaptive and innovative economic landscape. As technological progress creates new roles and skill demands, the overall employment outlook remains forward-looking and dynamic.

A Foundation of Stability

The stability in consumer sentiment is a positive indicator for policymakers and businesses alike. It shows that Americans remain confident in their financial well-being and the broader economy, even in the face of temporary challenges like the government shutdown or global trade tensions.

“Consumers are staying focused on what matters most—maintaining financial security and adapting to change,” said a senior economic analyst at Pantheon Macroeconomics. “Their confidence reflects the fundamental strength of the U.S. economy.”

With inflation gradually easing, employment adapting to modern demands, and spending holding strong, October’s steady consumer sentiment paints a reassuring picture: Americans remain optimistic, pragmatic, and forward-looking.