Tokyo, Japan – Japan's business sentiment among large enterprises continued its positive trajectory in the first quarter, marking the fourth consecutive quarter of optimism, according to official data released by the Cabinet Office and the Ministry of Finance on Wednesday. The overall Business Sentiment Index (BSI) reached +2.0, indicating a prevailing sense of confidence within the corporate sector.

The positive sentiment was primarily fueled by the robust performance of the non-manufacturing sector, which registered a BSI of +4.1, maintaining its positive streak for the tenth consecutive quarter. This sustained growth can be attributed to several factors, including improved price pass-through, allowing businesses to more effectively transfer rising costs to consumers without significantly impacting demand. The service industry experienced a notable surge in customer numbers, reflecting a recovery in consumer spending and increased economic activity. Furthermore, the information and communications sector witnessed a significant uptick in demand for software development and advertising revenue, driven by ongoing digital transformation and technological advancements.

However, the manufacturing sector faced headwinds, resulting in a BSI of -2.4, the first negative reading in three quarters. This downturn was largely attributed to escalating raw material costs and heightened consumer cost-consciousness, which particularly impacted the food manufacturing industry. Companies are grappling with the challenge of maintaining profitability in an environment where input costs are rising while consumers are becoming more price-sensitive.

Despite the challenges in the manufacturing sector, overall capital investment across all industries, including both large and small businesses, is projected to increase by 5.9 percent in fiscal 2025. This indicates a strong commitment to expanding capacity and enhancing productivity. The manufacturing sector is expected to lead this investment drive, with a projected growth rate of 10.0 percent, signaling a focus on modernization and technological upgrades.

Economic Outlook and Policy Implications:

Analysts suggest that the divergence in performance between the non-manufacturing and manufacturing sectors highlights the complex economic landscape Japan faces. The strong performance of the service sector indicates a resilient domestic demand, while the challenges in manufacturing underscore the impact of global supply chain disruptions and inflationary pressures.

The Japanese government is closely monitoring these trends and is expected to implement measures to support businesses, particularly in the manufacturing sector. This may include policies aimed at mitigating the impact of rising raw material costs, promoting technological innovation, and enhancing supply chain resilience. The Bank of Japan's monetary policy will also play a crucial role in maintaining price stability and supporting economic growth.

Looking ahead, the Japanese economy is expected to navigate these challenges through a combination of robust domestic demand and strategic policy interventions. The continued growth in capital investment signals a long-term commitment to enhancing productivity and competitiveness, which will be essential for sustained economic growth.