Key facts
- Japanese manufacturers' sentiment index was unchanged at plus-13 in July.
- Non-manufacturers' sentiment index fell to plus-25 from plus-32 in July.
- Manufacturers reported strong demand for semiconductors and AI server products.
- Rising costs due to Middle East conflict, weak yen, and interest rates impacted non-manufacturers.
- Manufacturers forecast sentiment to slightly improve to plus-14 in October.
- Non-manufacturers expect sentiment to hold steady at plus-25 in October.
Japanese manufacturers maintained a positive outlook in July, primarily driven by robust demand in the semiconductor sector, according to the latest Reuters Tankan survey. This contrasts with a decline in confidence among non-manufacturers, who are grappling with increased costs stemming from the Middle East conflict, a depreciating yen, and rising interest rates.
The manufacturers' sentiment index held steady at plus-13, reflecting strong orders for electronic components, chip applications, and AI servers. One manager from a precision machinery maker noted unprecedented order volumes and values, raising concerns about production capacity.
Conversely, the non-manufacturers' sentiment index dropped to plus-25 from plus-32. Managers in this sector cited cost pressures and geopolitical uncertainties, particularly related to the conflict involving Iran, as key concerns. Despite tentative signs of resolution in the Middle East, the situation remains fragile.
The survey, which polls firms from July 1 to July 10, indicated that while the Bank of Japan's own Tankan survey showed a strong business mood and record corporate inflation expectations, the central bank has also signaled caution regarding future price increases.
Looking ahead, manufacturers anticipate stable sentiment, with their index forecast to slightly increase to plus-14 in October. Non-manufacturers are expected to maintain their current sentiment level of plus-25, as business leaders continue to assess geopolitical risks and supply chain challenges.