Japanese business sentiment experienced a decline at the onset of 2024, as manufacturers’ confidence slipped to a six-month low in January. According to the latest Reuters Tankan poll, the manufacturers’ sentiment index decreased to +7 from +10 in December. This marks a consecutive decline, although the index remains in positive territory, indicating net optimism among manufacturers.
The results reflect a broader challenge within the materials-heavy sectors, where demand from major economies has softened. The sentiment index, calculated by subtracting the percentage of pessimistic responses from optimistic ones, showed the most significant pullback in the materials industries. Notably, the oil and ceramics sector saw one of the sharpest declines, plummeting to zero. Steel sentiment further deteriorated into deeply negative territory, while confidence in the chemicals sector also eased.
Manufacturers have cited lackluster demand conditions in key export markets as a primary concern. One steelmaker specifically highlighted a drop in orders from China for automotive-related goods, which has impacted overall sentiment. Additionally, some manufacturers pointed to declining consumer spending in both the United States and China, along with the adverse effects of tariffs on exports.
Mixed Results Across Sectors
In contrast to the pronounced declines in materials sectors, the automotive and electronic machinery sectors experienced only modest reductions in confidence. This suggests that parts of Japan’s industrial base are exhibiting resilience in the face of global economic pressures. Meanwhile, sentiment among non-manufacturers also edged slightly lower, with their index slipping to +32 from +33. This decline was primarily driven by wholesalers and retailers, although sectors such as information services, transport, and real estate showed improvement.
Some firms in the service sector noted a decline in Chinese tourism, linked to a diplomatic dispute between Japan and China. A department store manager reported a significant drop in sales from foreign tourists. Nonetheless, other businesses indicated that the overall demand from inbound tourism remains robust.
Looking ahead, companies anticipate a divergence in momentum. Manufacturers expect sentiment to recover to +10 by April, reflecting hopes for a cyclical rebound. In contrast, non-manufacturers forecast a decline in conditions to +26, signaling increasing caution in the services economy as it grapples with potential trade and tourism shocks.
For the Bank of Japan, these results present a mixed picture. While the manufacturing sector retains positive sentiment, it is clearly losing momentum. Conversely, domestic-facing sectors continue to be supported, yet they are becoming increasingly vulnerable to external pressures.
As the Japanese economy navigates these challenges, the implications of a weak yen may also raise concerns about potential intervention risks. The outlook remains complex, with various sectors reacting differently to the current economic landscape.
