Japan Business Sentiment Deteriorates Further in Q2

Japan’s Business Survey Index for large manufacturers rose to 4.7% in Q4 2025, up from 3.8% in the prior quarter and marking the strongest reading this year. The result also beat expectations of 4.1%, underscoring continued resilience despite trade frictions, growth concerns and mounting fiscal risks. Firms also faced the prospect of Bank of Japan rate increases, with markets pricing in a December move followed by 2 to 3 additional hikes in 2026. Forward guidance points to softer conditions ahead, with manufacturing sentiment projected to ease to 1.1% in Q1 and 1.3% in Q2 2026. The index, drawn from a survey of major manufacturers, remains a critical barometer for an economy where industrial output plays a central role.

Japan’s Business Survey Index (BSI) for large manufacturing firms unexpectedly rose to 3.8% in the third quarter of 2025, up from -4.8% in the previous quarter — the lowest reading since Q1 2024. The result easily beat market expectations for a decline to 3.3%, marking the highest level since Q4 2024 and the first return to positive territory in three quarters. The improvement reflects a sharp rebound in exports, as firms front-loaded shipments to the US ahead of newly imposed 15% blanket tariffs. Last week, US President Donald Trump signed an executive order to implement a trade deal with Japan, introducing 15% baseline tariffs on most Japanese goods, including automobiles. The BSI, based on a survey of large Japanese manufacturers, serves as a key gauge of economic health in a country heavily reliant on industrial output. Manufacturers remain optimistic about the months ahead, projecting a further rise to 3.9% in Q4, followed by a slight decline to 3.3% in Q1 2026.

Japan’s Business Survey Index for large manufacturing firms dropped to -4.8% in the second quarter of 2025, down from -2.4% in the previous quarter. The result defied market expectations for a rebound to 0.8%, marking the lowest level since Q1 2024. The deterioration reflects mounting challenges for Japan’s export-driven economy, which is struggling under the weight of new trade barriers introduced by US President Donald Trump. In early April, the US imposed sweeping reciprocal tariffs—initially a 20% levy on Japanese goods and a 25% tax on auto imports—before shifting to a flat 10% tariff on all countries except China. The BSI, based on a survey of large Japanese manufacturers, serves as a key gauge of economic health in a country heavily reliant on industrial output. Despite the current slump, manufacturers are optimistic about the months ahead, projecting a sharp rebound to 5.7% in Q3 and 8.4% in Q4.