Japan's Tankan Survey Shows Mild Improvement Amid Rate Hike Speculation

The Bank of Japan's Quarterly Tankan survey for Q4 2025 indicates a slight improvement in corporate sentiment, with the overall business confidence index rising to 12 from 10 in the previous quarter. The index for large manufacturers climbed to 25, up from 23, while non-manufacturers posted a reading of 10, unchanged from the prior period. These figures suggest a gradual recovery in domestic demand and improved outlooks among firms, particularly in industrial sectors. The modest gains in the Tankan survey come at a pivotal moment for monetary policy. With inflation sustained near the BOJ’s 2% target and core inflation holding at 2.3% year-on-year, the central bank is increasingly under pressure to normalize policy after more than a decade of ultra-loose measures. The survey’s performance strengthens the case for a rate hike, potentially as early as January 2026. Financial markets reacted promptly. The JPY/USD exchange rate rose to 147.80, its strongest level since October, reflecting increased demand for the yen ahead of possible rate normalization. Meanwhile, Japanese government bond (JGB) yields rose across the curve, with the 10-year benchmark yield climbing to 1.12%—a 14-basis-point increase from the prior week. The NIKKEI 225 index gained 0.9% on the news, driven by expectations of stronger domestic growth and improved profit margins for exporters. The implications extend beyond domestic markets. A BOJ rate hike would likely narrow the yield differential with major central banks, potentially attracting capital flows into Japanese assets. Exporters such as Toyota Motor Corp. and Sony Corp. stand to benefit from a stronger yen, though currency appreciation could dampen overseas competitiveness. Meanwhile, investors in JGBs face repricing risk as yields adjust to a higher for longer environment.