“The June 2025 Tankan report was unexpectedly resilient, with large manufacturers showing a small improvement in sentiment (13 vs. 12 prior) and maintaining their outlook (12, same as prior.) The non-manufacturing index decreased modestly from 35 to 34. Even the small manufacturers index surprised on the upside, falling from 2 to 1, versus an expectation of -1 published in the March 2025 Tankan. The overall picture is one of unexpected resilience for Japan’s corporates.
“Consistent with Japan plays the long game to keep structural recovery intact | Nikko AM Insights, corporates’ prudent inventory management paid off amid uncertainty; most industries report declines in excess inventories even despite a mild decline in supply and demand conditions.
“Industries of all sizes have downgraded the Sales outlook for FY2025, given the uncertainty in overseas demand in particular, though forecast Sales growth remains in positive territory – in the 1-2% range versus 2-3%. Large manufacturing exports in particular are expected to grow only 0.6% in FY2025 versus 4.4% in FY2024. There were also downgrades in current profits for FY2025, however very few substantial downgrades to current profits to sales ratios, implying no substantial anticipated deterioration in margins.
“Importantly, fixed investment forecasts remain extremely strong – particularly in large enterprises, expected to increase 14.3% y/y for manufacturers in FY 2025 and 9.9% for non-manufacturing. The expenditure on software, R&D and Fixed Investment (ex land) is anticipated to be even stronger, prompted by the upgrading of both fixed and intangible capital by firms, emerging from years of deferred investment. The production capacity still remains in mildly “insufficient” territory for all industries (particularly nonmanufacturing), implying that investment remains necessary to build production capacity.
“Meanwhile, employment conditions still show extreme labor scarcity for all industries (particularly labor-intensive non-manufacturing) but for smaller and mid-size companies, the labor shortage in June was somewhat less extreme than in March.
“Inflation expectations remain elevated for smaller enterprises in particular, on a 1- 3- and 5- year horizon, though for large enterprises, inflation expectations have abated below the BOJ’s target of 2% in the longer horizons. Overall, given the preponderance of smaller businesses; however, inflation expectations for all industries remain above 2% for all horizons, which implies that the BOJ should remain vigilant over price rises (anticipated to benefit from base effects in the latter half of the calendar year).
“Meanwhile, the USDJPY rate predicted by all businesses for FY 2025 end is 145.56, which is modestly above the current spot price.”
