The Bank of Japan's quarterly Tankan business survey showed confidence among major manufacturers slipped in the March quarter, posting its first decline in four quarters, in the face of stiff tariffs on U.S. imports of metals as well as President Trump's plans to slap reciprocal tariffs on imports from global trading partners. China's struggling recovery from its property market problems is also seen putting a damper on corporate sentiment.

Sentiment among non-manufacturers was either slightly firmer or unchanged. Large hotels and restaurants benefited from the flux of visitors from overseas who continued taking advantage of the weak yen. Record snowfall in many regions also boosted demand for winter clothing and heaters, which in turn propped up the retail chains.

The Tankan diffusion index showing sentiment among major manufacturers stood at 12, down from 14 in December as expected. The index measuring sentiment among major non-manufacturers was at 35, up from 33 in the previous poll.

The index for smaller manufacturers unexpectedly improved to +2 (consensus was -1) from +1, thanks to smaller negative indexes for steel mills and lumber producers as well as a pickup to a positive index for non-ferrous metals. Japan's latest trade data showed export volumes marked their first y/y rise in four months in February, possibly due to some rush exports to the key U.S. market in the face of the threat of stiff tariffs on imports of steel and aluminum among other goods. The index for their non-manufacturers was flat at 16, as expected.

Major firms projected their plans for business investment in equipment would rise a combined 8.7% on the year in fiscal 2024 ending in March 2025, down from +11.3% in the December survey and indicating firms are becoming more cautious in the face of a global trade war. Capex plans are generally supported by demand for automation amid labor shortages as well as government-led digital transformation and emission control. Smaller firms raised their combined capital spending plans to a 5.7% increase after lifting it to +4.0% in December from +2.6% in September. Smaller firms tend to have conservative plans at the start of each fiscal year and revise them up later.

Looking ahead, major firms plan a solid 3.1% rise in capex for fiscal 2025 ending in March 2026 (their first estimate) while smaller firms are set to start their plans for the incoming fiscal year with a larger-than-expected 10.0% drop.

BOJ policymakers will analyze this and other pieces of data ahead of their next policy meeting on April 30-May 1 when the board will discuss the timing for a further rate hike. The bank has been in the process of gradually normalizing its policy since it delivered its first rate hike in 17 years in March 2024.

The Bank of Japan’s quarterly Tankan business survey is forecast to show confidence among manufacturers slipped in the March quarter in the face of stiff tariffs on U.S. imports of metals and vehicles as well as President Trump’s plans to slap “reciprocal tariffs” on imports from global trading partners. China’s struggling recovery from its property market problems is also seen putting a damper on corporate sentiment. Sentiment among non-manufacturers appears to have edged up or being flat. The tourism industry is benefiting from an influx of foreign visitors amid the weak yen while rising costs of living are hurting consumer spending.

The Tankan diffusion index showing sentiment among major manufacturers is forecast at 12, down from 14 in December. The index measuring sentiment among major non-manufacturers is seen at 34, easing from 33 in the previous poll. The index for smaller manufacturers is forecast to dip to -1 from +1 while that for their non-manufacturers is seen unchanged at 16.

Major firms are expected to project their plans for business investment in equipment would rise a combined 9.1% on the year in fiscal 2024 ending in March 2025, down from +11.3% in the December survey and indicating firms are becoming more cautious in the face of a global trade war. Capex plans are generally supported by demand for automation amid labor shortages as well as government-led digital transformation and emission control. Smaller firms are expected to maintain their combined capital spending plans at a 4.7% increase after lifting it to +4.0% in December from +2.6% in September. Smaller firms tend to have conservative plans at the start of each fiscal year and revise them up later.

Looking ahead, major firms are forecast by economists to present a combined 2.6% rise in capex for fiscal 2025 ending in March 2026 (their first estimate) while smaller firms are expected to start their plans for the incoming fiscal year with a 3.9% drop.

The Tankan survey, which is conducted quarterly by the Bank of Japan, is considered the most complete reading of Japan's economic performance. The Tankan surveys individual components of the economy such as large and small manufacturing and nonmanufacturing enterprises. A key component of the survey deals with capital expenditures (CAPEX) going forward.

The Bank of Japan's Tankan survey is considered one of the most important indicators of the economy's health and helps the Bank of Japan determine monetary policy. It is widely used by investors to determine future investments in Japan. Firms are asked questions that cover a wide range of topics including the future direction of capital expenditure and pricing as well as the corporate outlook towards employment and the overall economy.

The data are broken down by large, medium and small manufacturers as well as the non-manufacturing sectors. A key number to watch is the all industries capital expenditure or CAPEX measures capital expenditure by all Japanese industries except the financial industry. The large manufacturers' index reflects the large international companies while the small manufacturers' index is reflects the domestic economy.