Japanese Firms Hit Four-Year High in Optimism Amid Iran War Uncertainties

Large Japanese manufacturers have reached their highest level of business optimism in over four years, despite uncertainties from the Iran war, according to the Bank of Japan's quarterly Tankan survey. The index for business optimism among large manufacturers rose to 17 in the first quarter of 2026, up from 15 in the previous quarter and exceeding the 16 expected by economists. This marks the highest level since the fourth quarter of 2021. The Nikkei 225 gained 4.48% on Wednesday following the data release, driven by hopes that the Iran war could end soon. However, analysts caution that the positive sentiment may not fully reflect the impact of the Iran war, as the survey period ended in March. Frederic Neumann, chief Asia economist at HSBC, noted that while the survey indicates strong momentum going into the conflict, the outlook for the coming months is increasingly uncertain. The Strait of Hormuz's closure is compounding challenges from soaring energy costs and supply chain disruptions. Norihiro Yamaguchi, lead Japan economist at Oxford Economics, echoed this view, stating that many responses do not reflect the full escalation of the Iran conflict. He expects higher energy prices to dampen corporate sentiment moving forward by worsening Japan's terms of trade. Japan is releasing oil stockpiles and implementing fuel subsidies to mitigate the energy shock from the closed Strait of Hormuz. The country relies on imports for over 87% of its energy needs, according to the International Energy Authority. A 10% increase in crude oil prices could raise Japan's consumer inflation rate by up to 0.3 percentage points over a year, as reported by Reuters.