Japan business sentiment stable, future outlook softens

The Bank of Japan's June 2026 Tankan survey indicates a stable, albeit cautious, business environment for Japanese enterprises.

The Business Conditions Diffusion Index (DI) for all industries and all enterprises held steady at 18, matching the March survey's actual result.

However, the forecast DI for the next quarter declined to 11, signaling a weaker outlook.

Large manufacturing firms reported an improvement in current conditions, with their DI rising to 22 from 17, yet their short-term forecast dropped significantly to 5. Similarly, large non-manufacturing firms maintained a high DI of 37, but their forecast plunged to 1. This divergence highlights a growing apprehension among businesses regarding future economic conditions, despite current stability.

The average predicted exchange rate for the US dollar against the yen for the first half of fiscal year 2026 also saw a revision, with the June survey forecasting 151.58 yen per dollar, compared to 149.60 yen in the March survey, suggesting expectations of a weaker yen.

Beyond sentiment, the survey revealed mixed signals across other key indicators.

Output prices in manufacturing are forecast to rise (DI 40), while input prices are expected to climb even further (DI 62), suggesting persistent cost pressures for manufacturers.

A significant tightening of profit margins is anticipated, with current profits for all enterprises across all industries forecast to decline by -6.4 percent year-on-year in the first half of fiscal year 2026, a sharp reversal from the 10.5 percent growth in the second half of fiscal year 2025.

However, fixed investment, including land purchasing expenses, is projected to increase by 6.8 percent for all industries in fiscal year 2026, a positive revision from the 1.4 percent actual growth in fiscal year 2025.