Japan factory sentiment jumps to four-year high, but outlook softens on geopolitical risks.Summary:Japan Reuters Tankan: manufacturers sentiment +18 (prior +13) — highest since Dec 2021Non-manufacturers steady at +25 (prior +25)June outlook: manufacturers seen at +14, non-manufacturers +21Strength driven by semiconductors, chemicals, and transport machineryWeak spots include steel (still negative) and paper/pulp sectorsMiddle East conflict, costs, and China demand weigh on outlookJapanese business sentiment improved sharply in March, with the Reuters Tankan survey showing manufacturers’ confidence rising to +18 from +13 in February, its highest level since December 2021. The data points to a near-term rebound in industrial momentum, supported by strength in semiconductor-related demand and a pickup across key manufacturing sectors.The improvement was broad but led by chemicals and petroleum-linked industries, where sentiment surged alongside stronger demand tied to the semiconductor cycle. The chemicals sector index climbed to 21 from 13, while petroleum and ceramics saw a sharp jump to 25 from 11. Respondents cited rising orders and improved visibility, particularly from chip-related industries, as a key driver of optimism.Transport machinery, a core pillar of Japan’s export economy, also showed resilience, with sentiment rising to 36 from 33, supported by solid vehicle production and strong order books. However, not all sectors shared in the recovery. The steel and non-ferrous metals segment remained deeply negative at -25, albeit improving from -44, reflecting weak demand linked to autos. Meanwhile, sentiment in textiles, paper, and pulp deteriorated sharply to 11 from 20, highlighting pockets of fragility.Outside manufacturing, sentiment among non-manufacturers held steady at +25 (unchanged from February), indicating stable conditions in the services sector. However, underlying concerns are emerging, particularly around softer Chinese demand.Looking ahead, the outlook is more cautious. Manufacturers expect sentiment to ease to +14 by June, while non-manufacturers are seen slipping to +21. The softer forward view reflects rising uncertainty tied to the Middle East conflict, elevated input costs, and external demand risks.In the current global environment, the data underscores a key theme: while Japan’s industrial sector is benefiting from cyclical tailwinds such as the semiconductor recovery, it remains highly exposed to geopolitical shocks and global demand dynamics. The escalation of tensions in the Middle East — and the associated rise in energy costs — is already weighing on business visibility and forward planning.For the Bank of Japan, the survey reinforces a delicate balancing act. Improving sentiment and firm activity support the case for continued policy normalisation, but the uncertain external backdrop is likely to keep the central bank cautious in the near term, even as it maintains a tightening bias. ---The Bank of Japan decision is just over 24 hours away:BOJ’s Ueda says inflation rising toward 2% ahead of policy meeting - recapJapan officials signal vigilance on yields, fiscal policy and FX as yen weakness persists This article was written by Eamonn Sheridan at investinglive.com.