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.

With energy prices driving inflation and burdening households, Takaichi’s policies aim to balance economic stability, environmental responsibility, and national resilience.

A Pro-Nuclear Vision for a Sustainable Future

Takaichi, known for her pragmatic and forward-looking approach, has long been an advocate of nuclear energy and next-generation fusion technology.

Her leadership signals a major push toward reviving Japan’s nuclear fleet, which she views as essential for cutting fuel import costs, reducing carbon emissions, and achieving long-term energy independence.

Following the Fukushima disaster in 2011, Japan’s nuclear sector saw years of hesitation and slow restarts. Of the 54 reactors previously in operation, only 33 remain technically operable, and just 14 have been restarted so far.

Takaichi’s government plans to accelerate the approval process for safe reactors, ensuring compliance with strict safety standards and community engagement.

“We aim to proceed with nuclear restarts while taking concrete steps to gain the necessary understanding of local communities and stakeholders,” said Ryosei Akazawa, Japan’s newly appointed Minister for Economy, Trade, and Industry.

Strengthening Ties with the U.S.

Takaichi’s appointment of Akazawa, a fluent English speaker and experienced negotiator of Japan-U.S. trade agreements, highlights her commitment to strong international cooperation, especially with Washington. Analysts see this as a sign that Japan will continue deepening energy and trade relations with the U.S.

Her government is preparing an energy package to present during U.S. President Donald Trump’s visit to Tokyo next week. The package includes additional liquefied natural gas (LNG) purchases from American suppliers, demonstrating Japan’s willingness to diversify energy sources while maintaining economic diplomacy.

However, Tokyo remains cautious about committing to the $44-billion Alaska LNG project, preferring a balanced approach that avoids overreliance on any single source.

Tackling Inflation Through Energy Reform

Japan spent an estimated 10.7 trillion yen ($71 billion) last year on imported LNG and coal — around 10% of the country’s total import costs. With 60% to 70% of Japan’s electricity generated from imported fossil fuels, energy prices have been a key driver of inflation and public frustration.

By restarting nuclear reactors and investing in domestic technologies, the Takaichi administration hopes to stabilize energy prices, cut emissions, and boost industrial productivity.

Lower electricity costs could ease pressure on both households and small businesses while supporting the competitiveness of Japanese manufacturing and data-driven industries.

Embracing Innovation and Energy Diversification

While nuclear power remains central to her strategy, Takaichi also emphasizes technological innovation and energy diversification.

She supports the development of perovskite solar cells, an emerging Japanese innovation that could redefine solar energy efficiency and become a valuable export technology.

However, she has expressed skepticism toward massive solar and wind projects, especially those dependent on imported Chinese components.

Instead, she aims to promote smaller-scale, domestically developed renewable technologies that align with Japan’s economic and environmental goals.

Industry analysts note that her approach could shift investment focus toward homegrown innovations, such as advanced nuclear and fusion technologies, which could make Japan a leader in clean, reliable energy.

A Balanced and Future-Oriented Energy Policy

Takaichi’s energy agenda reflects a balanced vision—one that acknowledges the importance of renewables but prioritizes energy reliability and national security.

Her stance on nuclear restarts is supported by many experts who argue that Japan cannot meet its decarbonization and affordability goals without restoring its nuclear capacity.

“Prime Minister Takaichi will almost certainly push for a more ambitious nuclear reactor relaunch,” said Henning Gloystein, managing director at Eurasia Group. “This will help bring down power prices while reducing dependence on imported fuels.”

As Japan faces growing energy demands from data centers, industry expansion, and climate goals, the Takaichi administration’s policies mark a turning point.

By combining nuclear innovation, international cooperation, and domestic research, Japan is positioning itself for a sustainable, secure, and economically vibrant energy future.

In the years ahead, Takaichi’s leadership may restore public confidence in nuclear technology and reaffirm Japan’s global role as a clean-energy pioneer—proving that a nation once scarred by disaster can emerge stronger, safer, and more self-reliant through bold, science-driven reform.