FX.co ★ Japan Q1 Business Mood Inches Higher

The Bank of Japan’s sentiment index for large manufacturers rose to 17 in Q1 2026, surpassing market expectations of 16 and reaching its highest level since Q4 2021. The improvement indicates that, so far, risks stemming from conflicts in the Middle East have not significantly undermined business confidence.

Sentiment improved among producers of pulp (44 vs. 40 in Q4), electrical machinery (22 vs. 21), processed metals (16 vs. 10), general-purpose machinery (34 vs. 27), production machinery (26 vs. 16), motor vehicles (13 vs. 9), and business-oriented machinery (15 vs. 9). Confidence remained unchanged in iron and steel (-15), food and beverages (9), and shipbuilding (35).

By contrast, sentiment weakened in textiles (-5 vs. -4), lumber and wood (0 vs. 7), petroleum (18 vs. 36), and chemicals (14 vs. 19). At the same time, large firms plan to increase capital expenditure by just 3.3% in Q1, a sharp slowdown from 12.6% previously and the smallest gain since Q1 2023, highlighting the impact of higher borrowing costs and mounting geopolitical uncertainty.