Business Business FILE PHOTO: Japanese national flag hoisted atop of the Bank of Japan headquarters is seen through trees in Tokyo, Japan January 23, 2025. REUTERS/Issei Kato/File Photo TOKYO : Business sentiment among big Japanese manufacturers worsened in the three months to March, a central bank survey showed on Tuesday, a sign escalating trade tensions were already taking a toll on the export-reliant economy. The survey, compiled before U.S. President Donald Trump's announcement last week of a plan to impose tariffs on auto imports, highlights how external headwinds are complicating the Bank of Japan's decision around the timing of further interest rate hikes. The outcome will be among key factors the BOJ will scrutinise at its next policy-setting meeting on May 1, when it will also release fresh quarterly growth and price forecasts. The headline index measuring big manufacturers' business confidence stood at +12 in March, down from +14 in December and matching a median market forecast, the BOJ's closely watched "tankan" survey showed. An index gauging big manufacturers' sentiment increased to +35 from +33 in December, compared with a median market forecast for a reading of +33. Big companies expect to increase capital expenditure by 3.1 per cent in the current fiscal year ending in March 2026, compared with a median market forecast for a 2.9 per cent rise, the survey showed. It was slower than a 8.7 per cent increase for the previous fiscal year that ended in March. Companies expect inflation to stay above the BOJ's 2 per cent target one, three and five years ahead, the tankan showed, suggesting that conditions for raising Japan's still-low interest rates were falling into place. The tankan was compiled in a period between Feb. 26 and March 31. Companies surveyed likely took into account Trump's decision in February to raise tariffs on imports of steel and aluminum to a flat 25 per cent, a move that was designed to help U.S. industry while contributing to an escalating trade war. He also has pledged to announce reciprocal tariffs on Wednesday targeting all countries. The BOJ exited a decade-long, radical stimulus programme last year and raised short-term interest rates to 0.5 per cent in January on the view Japan was on the cusp of sustainably hitting its inflation target. Governor Kazuo Ueda has said the BOJ will keep pushing up borrowing costs if continued wage gains underpin consumption and allow firms to raise prices, thereby maintaining inflation stably around its target. The BOJ is caught in a dilemma. Steady rises in food prices have kept inflation above its 2 per cent target for nearly three years which, coupled with prospects of sustained wage gains, heighten the case for a near-term rate hike. But uncertainty over Trump's tariff policy has jolted markets and stoked fears of a downturn in Japan's fragile economy, which may warrant going slow on future rate hikes. A Reuters poll showed many analysts expect the BOJ's next rate hike to come in the third quarter, most likely in July. The tankan's sentiment diffusion indexes are derived by subtracting the number of respondents who say conditions are poor from those who say they are good. A positive reading means optimists outnumber pessimists. Get our pick of top stories and thought-provoking articles in your inbox Stay updated with notifications for breaking news and our best stories Get WhatsApp alerts Join our channel for the top reads for the day on your preferred chat app Copyright© Mediacorp 2025. Mediacorp Pte Ltd. All rights reserved. We know it's a hassle to switch browsers but we want your experience with CNA to be fast, secure and the best it can possibly be. To continue, upgrade to a supported browser or, for the finest experience, download the mobile app. Upgraded but still having issues? Contact us