Japanese firms see stable conditions, expect weaker yen in 2026

The March 2026 Tankan survey indicates that business conditions for large enterprises remained stable, with the Diffusion Index (DI) for manufacturers holding at 17 and non-manufacturers at 36, unchanged from the December 2025 survey.

Medium-sized enterprises also reported stable conditions, while small enterprises saw a slight decline in sentiment.

However, the outlook for the next quarter suggests a softening, with the DI for all industries (all enterprises) forecast to drop to 7 from the current 18. Simultaneously, Japanese firms anticipate a continued weakening of the yen.

The average predicted exchange rate for USD/JPY in the first half of fiscal year 2026 rose to 150.10 from 147.37 in the December survey, signaling increased cost pressures for importers but potential benefits for exporters.

Looking at corporate performance, sales for all enterprises are projected to increase by 1.9 percent for manufacturing and 1.5 percent for non-manufacturing in fiscal year 2026.

Despite this, current profit forecasts present a mixed picture, with manufacturing expecting a 1.8 percent decline and non-manufacturing a 0.7 percent decline for the same period.

Fixed investment plans also show divergence: large enterprises forecast a 2.7 percent increase, medium-sized enterprises a 4.9 percent increase, but small enterprises anticipate a 1.4 percent decrease in fixed investment for FY2026. This suggests that while larger firms are confident in capital expenditure, smaller businesses remain cautious.