BANGKOK – A recent quarterly assessment by Japan’s central bank indicates a slight improvement in business sentiment, particularly within key heavy industries such as automotive manufacturing, fossil fuel, and machinery sectors, although the services sector expressed less optimism.

The Bank of Japan’s latest tankan survey, released on Friday, evaluates the divergence between companies optimistic about business conditions and those that are not. This data could play a significant role in the central bank’s deliberations regarding a potential increase in its benchmark interest rate at the forthcoming meeting. Following the survey results, anticipation for a rate hike diminished, leading to a decline in the Japanese yen, which was trading at 152.90 yen to the U.S. dollar—close to its highest in a fortnight. Concurrently, Japan’s benchmark Nikkei 225 stock index experienced a decrease of over 1%.

Commentary from IG suggests that the general expectation is for the Bank of Japan to uphold its short-term interest rate at 0.25%, marking the fourth consecutive meeting without any alterations. Japan’s economic growth was adjusted to a 1.2% annual rate for the previous quarter, driven by consistent consumer spending. However, as noted by IG economists, future prospects remain unclear, particularly in light of U.S. President-elect Donald Trump’s intentions to impose increased tariffs on various imports, which could potentially disrupt both regional and global economic stability.

Toh Au Yu from Capital Economics remarked that the modest improvement in business sentiment across companies of all sizes revealed by the tankan implies that robust activity rebound is unlikely this quarter after a slowdown in the last. A significant challenge faced by Japanese businesses is a critical labor shortage, which has arisen due to a declining workforce amid a shrinking population. The survey indicated an unchanged employment sentiment of negative 36 from the previous quarter.

Overall business sentiment for both manufacturing and non-manufacturing firms saw a gradual rise to 15 from the earlier 14. The sentiment index for large manufacturers increased to 14 in December from 13 in September, which was partly attributed to automakers resuming operations after being impacted by industry certification issues. Sectors such as construction and real estate also showed signs of improvement.

While the sentiment among major industries improved, retail and other service industries experienced a decline, with sentiment decreasing from 34 to 33, although it maintained a positive standing. Additionally, the retailer index fell sharply from 28 to 13.

Earlier this year, the Bank of Japan initiated a transition away from its previously adopted negative interest rate policy designed to keep credit exceptionally cheap, in a bid to bolster the economy amidst a decreasing population that is affecting demand. This ultra-loose monetary approach has been in place for an extended period to counter deflation, which saw prices declining due to weak demand. However, due to global price surges post-COVID-19 pandemic and a depreciation of the yen against other currencies, inflation levels have surpassed the BOJ’s objective of approximately 2%, allowing the bank to adopt a more conventional monetary policy.

In October, Japan faced a trade deficit for the fourth consecutive month, primarily influenced by the weaker yen and escalating energy prices that have driven import expenses higher. In light of this situation, Prime Minister Shigeru Ishiba has suggested raising the basic tax-free income allowance, increasing disposable incomes and providing subsidies to assist low-income families, all aimed at enhancing consumer spending. However, his minority government may encounter difficulties in garnering opposition support for budgetary and legislative matters, which could lead to potential political stalemates that may hinder economic initiatives.