Japanese Corporations Show Optimism Amid Iran War, But Analysts Warn of Lingering Risks

Large Japanese manufacturers have expressed their highest level of business optimism in over four years, despite the ongoing uncertainties from the Iran war. The Bank of Japan's quarterly Tankan survey, released April 1, revealed an index of 17 for business optimism among large manufacturers in the first quarter of 2026, up from 15 in the previous quarter and exceeding economists' expectations of 16. This marks the highest reading since the fourth quarter of 2021, according to LSEG data. The survey also showed large non-manufacturers maintaining a business sentiment index of 36, a multi-decade high and unchanged from the previous quarter, which also surpassed expectations of 33. The Nikkei 225 rose 4.48% on Wednesday following the data release, driven by hopes that the Iran war could soon conclude. Analysts attributed the optimism to solid corporate profits offsetting higher energy costs. However, the Tankan survey period ended in March, meaning the data may not fully capture the war's impact. Frederic Neumann, HSBC's chief Asia economist, noted that while the survey indicates strong momentum entering the conflict, the outlook for the coming months remains uncertain. The Strait of Hormuz's closure is exacerbating energy costs and supply chain disruptions. Norihiro Yamaguchi of Oxford Economics echoed these concerns, stating that the survey responses likely do not reflect the full escalation of the Iran conflict. Yamaguchi warned that rising energy prices could dampen corporate sentiment by worsening Japan's terms of trade. Japan, which relies on imports for over 87% of its energy needs, has released oil stockpiles and implemented fuel subsidies to mitigate the energy shock. 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.