Japan’s September Tankan showed a further improvement in manufacturing sentiment, with the large manufacturers’ business conditions DI rising from +22 to +24, just below the +25 consensus and the strongest reading since March 2018. Medium-sized manufacturers improved from +17 to +23 and small manufacturers from +9 to +14, indicating that the pickup extended beyond the largest firms. Services were less buoyant, however, as the large non-manufacturing DI slipped from +37 to +35, while firms across both sectors expect conditions to soften by December.
Price and demand indicators remained consistent with persistent underlying inflation pressure. Among large manufacturers, domestic supply-demand conditions improved from -4 to -1 and overseas conditions from -3 to -1. At the same time, the output-price DI held at +40, even as the input-price DI eased from +62 to +59, suggesting firms continued to maintain selling-price increases despite some moderation in cost pressure. Economy-wide inflation expectations also remained above the BOJ’s 2% target, with the one-year outlook easing from 2.7% to 2.6%, the three-year view unchanged at 2.6%, and the five-year outlook edging from 2.6% to 2.5%.
Corporate investment and financing conditions also showed little evidence of significant strain from higher rates. Large firms plan to raise fixed investment by 11.3% y/y in FY2026, while the all-enterprise financial-position DI held at +11 and banks’ lending-attitude DI remained at +13. Borrowing costs are nevertheless rising, with the loan-interest-rate DI climbing from +61 to +68. Overall, the Tankan points to a corporate sector that remains resilient, with manufacturing confidence, investment and pricing power holding firm even as companies increasingly feel the effect of higher interest rates.
Data Summary
| Business Conditions DI | June | September | December forecast |
|---|---|---|---|
| Large manufacturers | +22 | +24 | +21 |
| Large non-manufacturers | +37 | +35 | +30 |
| Medium manufacturers | +17 | +23 | +18 |
| Small manufacturers | +9 | +14 | +12 |
| All enterprises, all industries | +18 | +21 | +15 |
Manufacturing confidence strengthened across large, medium and small firms, while sentiment among large non-manufacturers eased from a high level. Firms generally expect conditions to soften toward year-end.
Inflation Expectations
| Expected change in general prices | June | September |
|---|---|---|
| 1 year ahead | +2.7% | +2.6% |
| 3 years ahead | +2.6% | +2.6% |
| 5 years ahead | +2.6% | +2.5% |
Inflation expectations edged lower at the one- and five-year horizons but remained above 2% throughout the forecast period.
Key Takeaways
- Large manufacturers’ sentiment improved from +22 to +24, while medium and small manufacturers also recorded sizeable gains.
- Large non-manufacturing sentiment softened from +37 to +35, showing that the improvement was concentrated more heavily in manufacturing.
- Large firms expect business conditions to moderate by December, with the manufacturing DI forecast at +21 and non-manufacturing at +30.
- Inflation expectations remained firm, with companies forecasting general prices to rise 2.6% over one year, 2.6% over three years and 2.5% over five years.
- Large firms plan to increase FY2026 fixed investment by 11.3% y/y, indicating continued corporate investment appetite despite higher interest rates.
- Large manufacturers forecast FY2026 sales growth of 7.6% y/y and current-profit growth of 13.6% y/y, supporting the improvement in sentiment.
- Corporate borrowing costs are clearly rising, but broader conditions remain comfortable: the loan-interest-rate DI increased from +61 to +68, while the financial-position DI held at +11 and banks’ lending-attitude DI at +13.
- Overall, the Tankan points to resilient corporate conditions, firm inflation expectations and robust investment, even as businesses increasingly feel the impact of higher borrowing costs.
