Japanese Corporate Optimism Rises Amid Iran Conflict, But Analysts Warn of Lingering Risks

Large Japanese manufacturers have shown their highest level of business optimism in over four years, according to the Bank of Japan's quarterly Tankan survey. The business optimism index for large manufacturers rose to 17 in the first quarter of 2026, up from 15 in the previous quarter and exceeding economists' expectations of 16. This marks the highest level since the fourth quarter of 2021. Meanwhile, large non-manufacturers maintained a business sentiment of 36, a multi-decade high and unchanged from the previous quarter, also surpassing the 33 expected by economists. The Nikkei 225 gained 4.48% on Wednesday following the release of the survey results, driven by hopes that the Iran war could soon conclude. Senior economist Carlos Casanova of UBP attributed the optimism to 'solid profits' that have offset higher energy costs. However, analysts warn that the Tankan survey, which ended in March, may not fully capture the impact of the ongoing Iran conflict. Frederic Neumann of HSBC noted that the survey is 'somewhat backward looking' and does not reflect the uncertainty of the Gulf conflict, which has led to soaring energy costs and supply chain disruptions. Norihiro Yamaguchi of Oxford Economics echoed this sentiment, stating that many responses do not account for the full escalation of the Iran conflict. Yamaguchi expects higher energy prices to dampen corporate sentiment in the future by worsening Japan's terms of trade. Japan, which relies on imports for over 87% of its energy needs, has taken measures such as releasing oil stockpiles and implementing fuel subsidies to mitigate the effects of the closed Strait of Hormuz. A 10% increase in crude oil prices could raise Japan's consumer inflation rate by up to 0.3 percentage points over a year, according to Reuters.