TOKYO — The diffusion index for major Japanese manufacturers rose to 17 in March from 16, according to the Bank of Japan's quarterly survey, marking the fourth consecutive quarterly improvement in business sentiment. The index measures the percentage of companies foreseeing good conditions minus those feeling pessimistic about the outlook.

The diffusion index for large non-manufacturers stood unchanged at 36, according to the same survey. Manufacturers posted incremental gains while non-manufacturing firms continued to report stronger sentiment.

Concerns about prices at gas stations and other consumer products in Japan have increased in recent months, while Japan's inflation rate has remained moderate overall.

Currency dynamics have shaped Japan's broader economic landscape. Historically, Japan benefited from a weak yen because of its large exports of automobiles and electronics, as a weaker currency increases the value of export earnings when converted back into yen. In recent years, however, a weak yen has negatively affected Japan because the country imports most of its energy, food, and manufacturing components. The U.S. dollar has strengthened against the yen recently.

On the monetary policy front, the Bank of Japan kept its interest rate unchanged at 0.75% in March 2026. The central bank had maintained a negative interest rate policy for years to combat deflation and ended that policy in 2024. The next monetary policy board meeting is scheduled for April 27 and 28, 2026, when policymakers will reassess economic and financial conditions.

Geopolitical developments have added to economic uncertainty facing Japan. A war is ongoing in Iran, and concerns about Japan's economic growth and oil supplies have increased in connection with the conflict. Investors and consumers are uncertain about the duration of the war in Iran and about potential remarks by U.S. President Donald Trump that could affect trade and diplomatic relations.

Japan's benchmark Nikkei 225 index experienced fluctuations in recent weeks. Market participants have weighed the improvement in domestic business sentiment against external factors, including volatile energy markets and shifts in the global trade environment.