Japan business mood slumps, bankruptcies seen rising as Iran war lifts costs

By Leika Kihara

TOKYO, April 8 (Reuters) - The Japanese business mood worsened in March to levels not seen since the start of the Ukraine war in 2022, a government survey showed, a sign surging oil costs and supply disruptions from the Middle East war were taking a toll on the fragile economy.

A separate survey by a private think tank also showed corporate bankruptcy cases rose for the fourth straight year in fiscal 2025 with further increases expected from around summer as surging costs from the conflict squeeze profits.

The findings align with the Bank of Japan's warning in a quarterly report on Monday over the potential economic hit from the conflict, and highlight uncertainty on whether the central bank will raise interest rates this month.

"The direct damage from the conflict appears to be limited so far. But given downside economic risks, the hurdle for the BOJ to raise rates in April could be high," said Toru Suehiro, chief economist at Daiwa Securities.

An index measuring business sentiment fell to 42.2 in March, down 6.7 points from the previous month to mark the lowest level since February 2022, the government survey showed on Wednesday.

"Japan's economic recovery is showing some weakness due to downward pressure from Middle East developments," the government said, downgrading its assessment from February.

WORRY OVER FUEL PRICES

Some retailers fret that rising fuel prices could hurt consumption, while several manufacturers said they were already facing shortages of raw materials, the survey showed.

Another index measuring sentiment two to three months ahead also worsened to 38.7 in March from 50.0 in February, hitting the lowest level since December 2020, it showed.

The BOJ ended a decade-long, massive stimulus in 2024 and raised interest rates including in December, when it took its short-term policy rate to 0.75%, on the view Japan was on the cusp of durably achieving its 2% inflation target.

BOJ Governor Kazuo Ueda has signaled the bank's readiness to raise rates again in the near term on growing conviction Japan was seeing a cycle of moderate wage and price rises kick in.

Data released on Wednesday showed Japan's real wages rose 1.9% in February, the most in five years, backing up the BOJ's view that conditions for further rate hikes could be falling into place.

But surging oil prices from the Middle East conflict have complicated the BOJ's decision on how soon to push up borrowing costs by adding to mounting inflationary pressure, while hurting an economy heavily reliant on fuel imports.

A survey by private think tank Teikoku Databank showed companies were under strain from high input and labour costs, even before the U.S.-Israel attacks on Iran on February 28 led to an escalating conflict in the Middle East.

Total bankruptcy cases in fiscal 2025, which ended in March, stood at 10,425, up 3.5% from the previous year and exceeding the 10,000 mark for two straight years, the survey showed on Wednesday.

"There is growing concern among firms about rising input costs as surging crude oil prices have pushed up prices not just for fuel and chemical goods, but for a wide range of items," such as plastic products, construction materials and fertilisers, Teikoku Databank said.

"Japan may see a surge in bankruptcies from around summer, leading to a good chance of an increase in bankruptcy cases during fiscal 2026," it said.