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Japan’s economy presented a mixed picture in July as manufacturers remained resilient on the back of strong demand for semiconductors and artificial intelligence (AI)-related products, while confidence among service-sector businesses weakened amid rising costs and geopolitical uncertainty, according to the latest Reuters Tankan survey.
The monthly survey, a closely watched indicator of the Bank of Japan’s (BOJ) quarterly Tankan business sentiment report, showed the manufacturers’ sentiment index held steady at plus-13 in July, unchanged from June.
The stable reading suggests Japan’s export-oriented factory sector continues to benefit from the global AI boom and robust demand for advanced chips despite an uncertain global economic backdrop.
Manufacturers reported a recovery in the semiconductor market, particularly for memory chips, alongside a sharp increase in orders for products used in AI servers and other chip-related applications. Demand for electronic components also continued to strengthen across industries.
A manager at a precision machinery company surveyed by Reuters said both the volume and value of orders had reached unprecedented levels, adding that expanding production capacity had become a key challenge.
However, the upbeat mood in factories contrasted with weakening confidence among businesses that depend on domestic demand.
The non-manufacturing sentiment index dropped to plus-25 in July from plus-32 in June, as companies grappled with higher operating costs, a weak yen and uncertainty arising from the conflict in West Asia.
Businesses said rising energy prices and borrowing costs were weighing on profitability, while geopolitical tensions continued to cloud the outlook.
“Although signs of a resolution to the Middle East issue are beginning to emerge, the situation has not yet recovered,” a manager in the service sector said in the survey.
The Reuters Tankan poll was conducted between July 1 and July 10 and received responses from 218 of the 511 companies surveyed. The indexes are calculated by subtracting the percentage of pessimistic respondents from the percentage of optimistic ones, with positive readings indicating overall optimism.
The latest findings broadly complement the Bank of Japan’s quarterly Tankan survey released earlier this month, which showed business sentiment climbing to its highest level in eight years as companies became more optimistic about economic conditions.
At the same time, the BOJ has cautioned that inflationary pressures remain elevated. Last week, the central bank said the conflict involving Iran could encourage more companies to raise prices later this year by increasing energy and input costs.
Although the United States and Iran reached a tentative agreement in June to end the conflict, the ceasefire has remained fragile, with intermittent missile exchanges keeping commodity and energy markets on edge.
Japan has already started to feel the impact of higher costs. Wholesale inflation accelerated to 6.3 per cent in May, the fastest pace in three years, suggesting businesses are increasingly passing higher input costs on to customers.
Looking ahead, manufacturers expect business conditions to remain stable, with the sentiment index projected to edge up to plus-14 by October. Confidence among non-manufacturers is expected to remain unchanged at plus-25, reflecting continued caution over geopolitical risks, supply chain disruptions and cost pressures.
