Japan Business Sentiment Falls to 1-Year Low

Japan’s Business Survey Index for large manufacturers unexpectedly fell to -1.8% in the second quarter of 2026 from 3.8% in Q1, the first negative reading since the second quarter of 2025. The latest reading missed market expectations of 4.2%, as businesses were weighed down by the Middle East conflict and surging oil prices. This heightened concerns about a potential economic slowdown, renewed inflationary pressures in Japan, and uncertainty over monetary policy. Looking ahead, manufacturing sentiment is expected to return to positive territory at 4.4% in Q3 and accelerate to 5.8% in Q4. The index, based on a survey of major manufacturers, remains a key barometer for an economy where industrial output plays a central role.

Japan’s Business Survey Index for large manufacturers fell to 3.8% in the first quarter of 2026 from 4.7% in Q4, but remained in positive territory for the third consecutive quarter. The latest reading came in below market expectations of 5.5%, as businesses grappled with the Middle East conflict and surging oil prices. That heightened concerns about a potential economic hit and renewed inflationary pressures in Japan, while complicating the outlook for fiscal and monetary policy. Looking ahead, manufacturing sentiment is expected to weaken further to 0.7% in Q2 before rebounding to 6.3% in Q3. The index, based on a survey of major manufacturers, remains a key barometer for an economy where industrial output plays a central role.

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.