Business confidence among Japan's major manufacturers climbed for a fifth consecutive quarter, even as soaring energy costs driven by recent conflict threaten to undercut profit margins for the country's smaller enterprises, according to the Bank of Japan's quarterly Tankan survey released Wednesday.
The survey's diffusion index—which measures companies expecting favorable conditions minus those feeling pessimistic—rose to 22 from 17 in the previous quarter. Large non-manufacturers, including the crucial services sector, saw their index edge up to 37 from 36. But the headline numbers mask a growing divide between Japan's export giants and the smaller firms that employ most of the country's workers.
Energy Prices Hit Households and Small Business
Higher fuel prices stemming from the Iran war added to inflationary pressures across Japan, though crude oil prices have fallen since the United States and Iran agreed on an interim deal to end the conflict. Japan imports nearly all of its oil and gas, making the population acutely vulnerable to global energy shocks. The yen's recent decline to near a 40-year low—trading at about 162 to the U.S. dollar on Wednesday—has compounded those concerns by making every barrel more expensive in local currency terms.
A weak yen has raised the value of exports' earnings when converted back into yen, helping Japan's giant exporters post stronger results. That benefit is being countered by rising energy prices that squeeze both manufacturers and consumers. Japan's chronic dependence on imported fossil fuels leaves households and small businesses exposed when currency and commodity markets move against them.
Central Bank Walks Tightrope on Rates
Last month, the Bank of Japan raised its benchmark interest rate to 1%, a three-decade high, citing challenges stemming from a weak yen and higher prices. The central bank has been trying to normalize monetary policy after decades of keeping interest rates near or below zero—a legacy of deflation that left wages stagnant and purchasing power eroded for ordinary workers.
Analysts said Japan's economic indicators, such as investments, remain relatively strong despite longer-term structural problems including a chronic labor shortage due to an aging and declining population. That demographic crisis threatens to undermine social safety nets and public services unless policymakers act to boost immigration or productivity.
Diverging Fortunes by Company Size
Amova Asset Management Chief Global Strategist and Chief Economist Naomi Fink said, "Sales remain firm, especially for large enterprises, but profits are expected to weaken." She added that "Fixed investment plans are strong for large and mid-size firms but less so for small firms."
That gap matters. Small and medium enterprises employ the majority of Japanese workers and serve local communities that don't benefit directly from export booms. When energy costs rise and currency weakness makes imports expensive, these firms lack the pricing power and global revenue streams that insulate larger corporations. The result is a two-tier recovery that risks leaving working families behind.
Why This Matters:
Japan's improving business sentiment reflects genuine economic momentum, but the uneven distribution of gains raises questions about who benefits from growth. Large exporters can hedge currency risk and pass costs along global supply chains. Small firms and households can't. Rising interest rates, necessary to stabilize the yen and contain inflation, will increase borrowing costs for families and smaller businesses already squeezed by energy prices. Without targeted support—whether through energy subsidies, wage policies, or investment in domestic renewable capacity—Japan's recovery could deepen inequality rather than deliver broadly shared prosperity. The country's aging population and labor shortages make inclusive growth not just a matter of fairness, but economic necessity.