Japan big manufacturers sentiment rises to plus 24 as Bank of Japan weighs rate path

Manufacturing and services sentiment

Japanese business sentiment among large manufacturers improved in the third quarter of 2026, marking a sixth consecutive quarterly gain in the Bank of Japan tankan survey published on 1 October. The headline diffusion index measuring sentiment among large manufacturing firms rose to plus 24 in September from plus 22 in June, indicating that the economy was weathering fallout from the Middle East conflict despite falling just short of market projections of plus 25. The diffusion index measures the proportion of firms reporting favorable operating conditions minus those reporting unfavorable conditions. Sentiment among large non-manufacturers declined to plus 35 from plus 37 in June, representing the first drop in five quarters and trailing market forecasts of plus 36. For the fourth quarter ending in December, outlook indicators pointed to cautious sentiment, with large manufacturers projecting an index of plus 21 and large non-manufacturers projecting plus 30.

Inflation expectations and policy shift

The tankan survey showed that corporate price expectations remain elevated well above the central bank target across multi-year horizons. Surveyed companies projected domestic inflation to reach 2.6% three years from now and 2.5% five years from now, reflecting expectations of persistent price growth above the official 2% objective. The findings follow the Bank of Japan decision in September to lift its policy rate to 1.25%, the highest borrowing level in 31 years since 1995. A summary of opinions from the September policy meeting confirmed that policymakers have reoriented their focus toward preventing inflation from overshooting the 2% target. Former Bank of Japan board member Makoto Sakurai, who maintains ties to sitting policymakers, stated that the central bank is likely to raise its policy rate to 2% by around June 2027.

Monetary timeline and upcoming decisions

Bank of Japan Governor Kazuo Ueda initially maintained steady interest rates for a year after taking office in 2023 before exiting a decade of broad monetary stimulus. The central bank subsequently raised rates once in 2024 and twice in 2025 under a strategy focused on downside economic risks, prior to its September 2026 adjustment. Policymakers are evaluating whether to deliver another rate increase in October or December. While Governor Ueda indicated that consecutive rate increases require clear risks of sharp price surges or underlying inflation above 2%, policymakers are preparing to act pre-emptively to avoid drastic moves later. Market expectations for an October move have been shaped by currency dynamics, as a weaker yen elevates import costs and household expenses, though official data confirmed that Japan conducted no foreign exchange interventions between 27 August and 28 September.

Equities and sectoral performance

Tokyo equity markets reacted to the tankan release and central bank policy expectations during Thursday morning trading. The Nikkei Stock Average climbed 1.0% to 67401.66, supported by advances across semiconductor and technology manufacturers. Kioxia Holdings gained 3.4% and Tokyo Electron rose 3.1%, offsetting broad declines across the financial and insurance sectors. Among financial institutions, Mitsubishi UFJ Financial Group declined 2.4%, while Tokio Marine Holdings fell 4.5% during the morning session.