Japanese Manufacturers’ Sentiment

by Kantaro Komiya

Tokyo (Reuters) – Japanese manufacturers’ sentiment recovered in January after a dip last month due to better conditions in material industries; however, the outlook remains flat amid uncertainty over proposed Trump policies, according to the Reuters Tankan poll.

The improving business confidence is a positive indicator for the Bank of Japan’s (BOJ) expectation that wage-driven economic growth will support stable inflation around its 2% target and warrant a potential rate hike at its next policy meeting on January 23-24.

The survey, which included responses from 505 non-financial major Japanese firms, indicated that manufacturers’ mood rose to plus 2 in January from minus 1 the previous month, marking the first negative reading in 10 months.

The Reuters Tankan indexes are calculated by subtracting the percentage of pessimistic respondents from the optimistic ones. For the latest survey, 235 firms provided responses anonymously between December 24 and January 10.

The recovery in sentiment was most notable among upstream industries like steel, oil refining, and chemicals, attributed to a rise in global demand. In contrast, sentiment in machinery sectors, including autos and electronics, worsened in January.

Looking ahead to the next three months, manufacturers’ confidence is projected to remain unchanged at plus 2 in April.

Even sectors that expressed increased optimism noted several concerns that moderated their outlook. A ceramics company manager mentioned, “While the plant-related business remains robust, there are fears that the automotive parts business will suffer from Japanese automakers’ struggles in China and Southeast Asia. The semiconductor-related business is also facing a delayed recovery in market conditions.”

Multiple managers from chemical firms expressed concerns over weak domestic demand in Japan.

These mixed views reflect the BOJ’s tankan poll results in December, which showed slight improvements in current conditions but a negative outlook.

Managers are uncertain about the future of U.S. government policies, especially regarding international trade, with President-elect Donald Trump set to take office on January 20. A machinery maker’s manager stated, “It’s difficult to take any action now given the uncertainty about what policies will be implemented and whether tariffs will really be increased.”

Meanwhile, the service-sector index improved slightly to plus 31 in January from 30 in the previous month, with expectations that it will remain stable at 31 in April.

A retail company manager noted, “With high domestic consumer confidence, the number of customer visits, including inbound tourists, is growing steadily.”

Progress has been observed by a construction firm manager in transferring costs to service prices to ensure profits, despite challenges from a labor shortage.

Recent data indicates that wage increases in Japan are becoming more widespread while the inflation rate remains above the BOJ’s 2% target, reinforcing market expectations for a potential interest rate hike in the near future, in spite of soft consumer spending and factory output.