Japanese manufacturers showed increased caution in June, worried about U.S. tariffs and weak demand from China, according to the Reuters Tankan survey. The manufacturers’ index dropped to +6 in June from +8 in May, with expectations that it may fall further to +2 in the next three months. The sentiment among non-manufacturers stayed at +30 in June but is expected to decrease to +24 by September. Companies are particularly concerned about U.S. trade policies and tariffs affecting autos and parts. A machinery firm reported delays in client investments, while a chemical company shared that a client moved production to the U.S. to avoid tariffs. Additional challenges include weak demand from China and restrictions on rare earth exports.

Service Sector Optimism

Service sector companies felt more optimistic, thanks to strong IT spending and increased tourism. However, rising labor costs and staffing shortages are still significant concerns. The Reuters Tankan survey, which reflects the Bank of Japan’s quarterly tankan survey, measures business sentiment by subtracting the percentage of negative responses from positive ones. A positive result indicates more optimism than pessimism. The Reuters Tankan survey provides a monthly look at business sentiment among Japanese firms. It works by subtracting negative responses from positive ones. A score above zero means more firms feel positive than negative. This trend is still holding, but just barely. In June, the mood among manufacturers dipped slightly. Although remaining positive, the index fell from +8 to +6, with expectations of a further decline to +2 in the next three months. More companies are feeling less confident about the near future, primarily due to ongoing worries about U.S. tariffs and declining demand from China. This shift has direct impacts. A machinery firm has noted delays in clients’ investment decisions, indicating hesitation. When major buyers choose to hold off on spending, it often points to broader unease. Additionally, a chemical firm observed that some customers are moving operations to the U.S.—a clear sign that companies are adapting to avoid tariffs. These changes are happening now and are affecting production capacity and order books in Japan. Adding to these concerns are the restrictions on Chinese rare earth exports, crucial for many high-tech products. This creates additional pressure on technical industries, leading to rising prices and reduced profit margins.

Services Sector Steadiness

In contrast, the sentiment in the services sector remained stable in June at +30. However, forecasts suggest it will drop to +24 by September. Optimism is fueled by strong demand in IT and tourism, which help keep the economy active. Still, these positive factors are overshadowed by emerging challenges. Employers are facing rising wage costs due to a tighter labor market. More tourists mean a need for more staff. If restaurants, hotels, and transport services struggle to hire quickly, service quality could decline—putting repeat business and profits at risk. So, while spending is growing in digital and travel sectors, expansion comes with challenges. This indicates a growing gap between expectations in goods-related firms and the steadiness of services, which still face pressure. Investors focused on financial markets should consider this divergence carefully. Prices reflect future conditions, not the present. If client investments are slow in crucial sectors and input costs rise unpredictably, strategies focused on industrial stability could be caught off guard. From our perspective, we monitor indicators like export orders, capital expenditure projections, and foreign exchange reactions to changing trade policies. These data points provide a clearer measure than sentiment alone. Some manufacturers may adjust production cycles or import schedules. Increased volatility in spot prices or unique hedging requests for raw materials often signal what’s on the horizon. As it stands, we think that trends in service-related contracts may continue to diverge from those linked directly to goods. Labor costs are likely to stay high, but unless domestic consumption decreases significantly, they may be manageable, even if not easily. Sensitivity to China’s economic activity remains sharp; any hint of recovery there could unexpectedly lead to positive changes. For now, the overall mood is cautious. Businesses aren’t closing up shop, but they also aren’t moving forward boldly. We’re paying closer attention to margin compression and delayed spending decisions than headlines may suggest. Create your live VT Markets account and start trading now.

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