Japan's large manufacturing sector has reported its highest business sentiment in nearly eight years. Despite rising oil and raw material prices due to instability in the Middle East, demand for artificial intelligence (AI) and semiconductors has bolstered the economy. The yen has fallen to its lowest value in about 40 years, increasing import costs and prompting companies to pass on these costs to consumers, which may strengthen speculation about further interest rate hikes by the Bank of Japan (BOJ). However, the government is reportedly trying to curb rate increases, preventing a stabilization of the yen's decline.
In the BOJ's June survey of nationwide corporate short-term economic outlook, the diffusion index (DI) for large manufacturers rose to +22, up 5 points from the March survey. This marks five consecutive quarters of improvement, the highest level since March 2018. Private economists had anticipated a downturn, but the actual results significantly exceeded market expectations of +16.
The DI for large non-manufacturers also increased to +37, a 1-point rise from March and the highest level in about 35 years since August 1991. The DI is calculated by subtracting the percentage of companies reporting poor conditions from those reporting good conditions. The survey was conducted from May 28 to June 30, with over 99% of the targeted companies responding.
AI and semiconductor demand have driven improvements in the manufacturing sector. Continued investments in semiconductors and data centers have enhanced conditions for non-ferrous metals, production machinery, and business machinery. The DI for non-ferrous metals rose by 13 points to +36, while production machinery increased by 10 points to +36. Business machinery also saw an 8-point rise to +23.
According to the Japan Machine Tool Builders' Association, orders for machine tools in May reached 177 billion yen (approximately $1.7 billion), a 38% increase from the same month last year, marking 11 consecutive months of growth. Analysts suggest that demand related to data centers, power generation facilities, and semiconductor manufacturing equipment is spreading throughout Japan's manufacturing sector. Junya Takemoto, a senior economist at Mitsui Sumitomo Bank, stated in an interview with Nikkei, "The benefits of AI and semiconductor-related demand are appearing across a wide range of sectors, not just specific industries."
In the non-manufacturing sector, the accommodation and food services, as well as retail industries, showed relative strength. The DI for accommodation and food services rose by 12 points to +46, while retail increased by 7 points to +33. In May, despite a decrease in Chinese tourists, visitors from Europe and the United States maintained a robust trend. The movement to reflect rising labor and raw material costs in selling prices has also contributed to the improvement in conditions.
However, there were significant disparities among sectors. The DI for ceramics and stone products, heavily impacted by rising oil and raw material prices, fell by 14 points to +11. The DI for metal products also dropped by 5 points to +11, while the automotive sector saw a slight decline of 1 point to +12. This indicates a widening gap between sectors benefiting from AI demand and those facing high energy and raw material cost burdens.
The weak yen presents another variable. In this survey, companies set the exchange rate for their 2026 business plans at 152.57 yen per dollar. However, on the foreign exchange market, the yen's value fell to as low as 162.77 yen per dollar on July 1, marking a new low in nearly 40 years. This represents a drop of about 10 yen more than companies had anticipated. While this could improve profitability for export companies, it increases cost burdens for those reliant on imports for oil and raw materials.
Companies also expect inflation to remain persistent. The anticipated inflation rate for the next year among all companies is 2.7%, the highest since March 2023. There is a growing trend to pass on rising costs to product and service prices. Nobuyasu Atago, chief economist at Rakuten Securities Economic Research Institute, commented to Nikkei, "The risk of inflation is high, and the results of this survey can be interpreted as a hawkish message from the Bank of Japan."
However, the continuation of improved business sentiment remains uncertain. The outlook for large manufacturers dropped to +17, 5 points lower than in the current survey. The non-manufacturing outlook also fell to +28, down 9 points. Some companies have accelerated demand due to concerns over procurement disruptions stemming from instability in the Middle East, leaving rising costs, consumer slowdown, and labor shortages as ongoing challenges ahead.
* This article has been translated by AI.
Copyright ⓒ Aju Press All rights reserved.