In August, Japanese manufacturers found themselves treading uncertain waters, as confidence in business conditions took a slight dip, while the service sector’s mood softened. This shift, revealed in the latest Reuters Tankan survey, comes against the backdrop of sluggish demand from China, a key player in the global economic arena, casting a long shadow over corporate sentiment in Japan.
This sentiment slip follows the Bank of Japan’s (BOJ) surprising decision last month to raise interest rates to levels not seen in 15 years, alongside a comprehensive strategy to taper its massive bond-buying program. The move by the BOJ marked a significant shift in Japan’s monetary policy, intended to curb inflation and stabilize the economy, yet it seems to have added to the uncertainty that businesses are now grappling with.
The Reuters Tankan survey showed that the sentiment index for manufacturers dipped slightly to plus 10 in August, down by a point from July. But the forecast isn’t rosy—the index is expected to fall further to plus five over the next three months, a worrying sign for Japan’s industrial sector.
The survey highlighted that Japan’s auto industry, particularly reliant on Chinese markets, is feeling the pinch. “Auto sales are sluggish, especially in China,” noted one manager from an auto and transport machinery firm. This isn’t an isolated issue; other industries, including chemicals, steel, and electronics machinery, echoed similar concerns about dwindling demand from China.
Adding to the concerns are higher inflation and volatile financial markets, which have businesses on edge. “Uncertain factors such as the cost of raw materials and foreign exchange rates are increasing,” remarked a manager at a rubber company, encapsulating the broader unease within Japan’s corporate sector.
The timing of the Reuters poll—conducted from July 31 to August 9—couldn’t have been more tumultuous. During this period, Japanese stocks plummeted in what became their worst single-day decline since the infamous Black Monday of 1987. This selloff was triggered by weak U.S. labor data, which stoked fears of a looming recession, while a sudden surge in the yen against the dollar as investors unwound the carry trade added to the market chaos.
In the service sector, the Reuters Tankan index eased for a second consecutive month, slipping to plus 24 in August from plus 26 in July. However, there’s a glimmer of hope on the horizon; non-manufacturers are optimistic that the index will rebound to plus 26 by November, buoyed by strong inbound demand which continues to support the sector’s confidence.
The Reuters Tankan indexes, which are calculated by subtracting the percentage of pessimistic responses from optimistic ones, provide a snapshot of the economic mood across Japan. With a positive figure, it indicates that optimists still outnumber pessimists, but the margin is narrowing.
In total, 506 large non-financial firms were surveyed, with 243 firms responding on condition of anonymity, providing a candid look at the sentiments shaping Japan’s economic outlook as it navigates these choppy waters.
