Japan's large manufacturers have reported improved business sentiment for the sixth consecutive quarter, reaching its highest level since March 2018. Strong demand for artificial intelligence (AI) and semiconductors, along with the ability to pass on rising raw material costs to selling prices, has supported corporate profits. In contrast, the non-manufacturing sector experienced a decline in sentiment for the first time in five quarters due to reduced demand from price increases and adverse weather conditions.
According to the Nikkei newspaper on October 1, the Bank of Japan (BOJ) reported in its September Short-Term Economic Survey of Enterprises (Tankan) that the diffusion index (DI) for large manufacturers rose to 24, an increase of 2 points from the June survey. Meanwhile, the DI for large non-manufacturers fell to 35, down 2 points. Both indices fell short of private economists' expectations of 25 and 36, respectively.
The DI is calculated by subtracting the percentage of companies that responded that business conditions are 'bad' from those that said they are 'good.' The survey was conducted from August 26 to September 30, with a response rate of 99% from the participating companies.
The impact of the BOJ's interest rate hike in September was only partially reflected in this survey. The central bank raised its policy interest rate to 1.25% during its monetary policy meeting on September 17-18, but about 70% of the surveyed companies had completed their responses by September 9.
In the manufacturing sector, demand related to AI, such as for data centers, has boosted sentiment across various industries. The DI for steel rose to 6, a significant increase of 12 points from the previous quarter, while ceramics, including glass and cement, increased to 22, up 11 points. Non-ferrous metals also saw a rise to 45, an increase of 9 points. Despite rising raw material prices, including oil due to geopolitical tensions in the Middle East, companies have managed to sustain profits by passing these costs onto selling prices.
However, there were significant differences among sectors. The food industry saw a decline to 3, down 6 points, while the paper and pulp sector fell to 36, down 4 points. The automotive sector also decreased to 11, down 1 point, affected by rising costs due to geopolitical instability in the Middle East.
In the non-manufacturing sector, demand has weakened due to price increases, compounded by disasters and adverse weather conditions such as earthquakes and prolonged rain. Rising labor costs have also been a burden. The accommodation and food services sector dropped to 38, down 8 points, while retail fell to 29, down 4 points. Wholesale also decreased to 30, down 3 points. In contrast, construction rose to 56, and electricity and gas increased to 6, both up 4 points.
Companies have expressed cautious outlooks for future business conditions. The future DI for large manufacturers is expected to be 3 points lower at 21, while non-manufacturers anticipate a 5-point decrease to 30. Concerns about worsening profits due to rising costs and geopolitical uncertainties have influenced these projections.
Investment plans have been revised upward. The overall scale of capital investment for the 2026 fiscal year is projected to increase by 7.6% compared to the previous year, higher than the 6.8% increase forecasted in June. The manufacturing sector is expected to see an 8.3% increase in investment, up 0.7 points, driven by expansions in AI-related production capacity. However, rising construction costs have also impacted the increase in investment amounts. The Nikkei noted that capital investment plans tend to be revised upward during the year but decrease as the fiscal year progresses, indicating that this year's growth rate is lower than last year's 8.4% when comparing the same September surveys.
Companies have adjusted their expected exchange rate for the 2026 fiscal year from 152.57 yen per dollar in the June survey to 154.23 yen.
Additionally, a separate survey conducted by the Nikkei in September found that 52.6% of executives believe the Japanese economy is experiencing moderate expansion. The reasons cited for this expansion include increased capital investment at 83.6%, rising wages at 78.1%, and recovery in personal consumption at 72.6%. Looking ahead to March of next year, 50.3% expect the economy to continue its moderate expansion.
However, executives who reported that the economy is stagnant cited high resource and raw material prices and geopolitical risks as major concerns. Despite expectations for recovery due to increased investment and wages, worries about rising costs persist.
* This article has been translated by AI.
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