Business sentiment among large manufacturers dipped for the first time in two years amid concerns over U.S. trade policy and a stronger yen, the Bank of Japan’s tankan survey showed Monday.
The key index measuring confidence among companies such as carmakers and electronics firms stood at plus 24 in March, down 2 points from December. The result was weaker than the average market forecast of plus 25 in a Kyodo News survey.
U.S. President Donald Trump’s decision to levy stiff tariffs on steel and aluminum imports had a sobering effect after a stretch of optimism fueled by strong demand for Japanese exports.
Japan was not included on a list of economies recently unveiled by Washington that are exempt from the tariffs.
A strengthening yen, which generally hurts manufacturers by making domestically made products less price competitive abroad and undermining the value of overseas profits in yen terms, also weighed down sentiment.
Large manufacturers expect the dollar to average ¥109.66 this fiscal year, compared with an estimated ¥110.67 for the previous year.
The index for large nonmanufacturers, including the service sector, was plus 23, also down 2 points from the previous survey.
The latest tankan, however, hardly made economists pessimistic about the world’s third-largest economy, with the headline index still close to the highest level in over a decade.
Economists argue Japan is on a solid recovery path on the back of a global economic recovery, with investments linked to the Tokyo 2020 Olympics also giving the economy a booster shot.
“The yen’s appreciation dented corporate confidence temporarily,” said UBS economist Takuji Aida.
“But the underlying sentiment is solid, as seen in their plans to accelerate spending on plants and equipment,” he said. “Weak stock prices (since February) have not prevented them from stepping up capital spending.”
The indexes represent the percentage of companies reporting favorable business conditions minus the percentage reporting unfavorable ones.
Large companies, classified as those with capital stock of more than ¥1 billion ($9.4 million), across all industries planned to raise capital spending during the new fiscal year that began Sunday by 2.3 percent compared with the previous year.
The figure was down from an estimated 5.2 percent for the year through March 31.
The BOJ surveyed a total of 10,020 companies between Feb. 26 and Friday, of which 99.3 percent responded.