The steady manufacturers’ reading, underpinned by robust semiconductor and AI server demand, supports the BOJ’s narrative that AI-linked external demand is reinforcing growth even as service sector confidence softens on cost pressures. The divergence between resilient goods sector sentiment and weakening non-manufacturer mood adds a layer of nuance to the BOJ’s hiking calculus, since persistent cost pass-through concerns among services firms align with the central bank’s stated wariness over underlying inflation risk. With both indexes expected to hold broadly steady into October, the survey offers no clear signal of imminent deterioration, leaving the rate path debate centred on whether price increases become entrenched rather than on any sharp shift in business sentiment.
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Japan’s manufacturers hold firm on chip demand while services feel the cost squeeze.
Summary:
- The Reuters Tankan showed manufacturers’ sentiment unchanged at plus 13 in July from June
- Non-manufacturers’ sentiment fell to plus 25 in July from plus 32 in June
- Manufacturers pointed to a recovery in semiconductor and memory related demand, with rapidly expanding orders for chip applications and AI servers
- Non-manufacturers cited cost pressures and uncertainty tied to the US-Israeli conflict with Iran as weighing on sentiment
- The survey drew responses from 218 of 511 firms polled between 1 and 10 July
- Manufacturers’ sentiment is forecast to edge up to plus 14 in October, with non-manufacturers seen holding at plus-25
- Japan’s wholesale inflation hit a three-year high of 6.3% in May, reflecting cost pass-through from the energy shock
Japanese manufacturers’ sentiment held steady in July while confidence among non-manufacturers softened, according to the latest Reuters Tankan survey, a closely watched leading indicator ahead of the Bank of Japan’s own quarterly Tankan report. The monthly poll showed the manufacturers’ index unchanged at plus-13 from June, supported by solid semiconductor demand, while the non-manufacturers’ index eased to plus 25 from plus 32 as the Middle East conflict, a weak yen and rising interest rates pushed up costs.
Manufacturers reported a recovery in the semiconductor market, including memory related demand, alongside rapidly expanding orders for products used in chip applications and AI servers. Orders for electronic components were also rising broadly. One manager at a precision machinery maker described order volumes and values as being at unprecedented levels, adding that capacity constraints were becoming a concern.
The survey, conducted from 1 to 10 July, drew responses from 218 of 511 firms polled. Index readings are calculated by subtracting the share of pessimistic responses from the share of optimistic ones, meaning positive figures indicate net optimism. On the services side, sentiment was weighed down by cost pressures and lingering uncertainty over the conflict between the United States, Israel and Iran. A manager in the service sector noted that although signs of a resolution were beginning to emerge, the situation had not yet fully recovered.
The reading follows the BOJ’s own Tankan survey earlier this month, which showed business sentiment at an eight-year high and corporate inflation expectations rising to record levels. The central bank has separately signalled caution on inflation, warning that the conflict involving Iran was likely to prompt more firms to raise prices later this year. Although the United States and Iran reached a tentative agreement in June to end hostilities, the truce has remained fragile, with both sides continuing to exchange strikes. Japan’s wholesale inflation spiked to a three-year high of 6.3% in May, a sign firms were already passing on higher energy related costs.
Looking ahead, manufacturers expect sentiment to remain broadly stable, with the index forecast to edge up to plus-14 in October, while non-manufacturers are expected to hold at plus-25 as businesses continue to assess the fallout from geopolitical risk and supply chain challenges.
This article was written by Eamonn Sheridan at investinglive.com.
