Japan manufacturer confidence near five-year peak, services fall

The divergence carries implications for the Bank of Japan. The robust manufacturing sector bolsters the argument that the economy can withstand additional rate rises, yet service and property respondents pointed squarely to higher borrowing costs and reduced household expenditure as headwinds. The pattern aligns with the gradual, no-pre-set-pace strategy that board member Ayano Sato discussed this week, rather than a faster tightening. Cost pressures persist, particularly for food producers hit by rising raw material expenses, and the energy price shock from the Middle East is expected to maintain this pressure while oil prices stay elevated. For stock markets, the findings support positions tied to chip-equipment and machinery, while domestically oriented retail, food and property companies appear more vulnerable.

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Previously published:

• Japan media says BOJ's Sato, a September dissenter, endorses gradual rate increases

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Chip firms and machinery companies in Japan have seldom been so upbeat, although the services sector is beginning to feel the pinch from higher interest rates, climbing expenses, and tightened household finances.

Key findings:

• The Reuters Tankan manufacturers index stood at +22 in October, up from +21 and the highest reading since December 2021
• Precision machinery, which covers chip equipment firms, climbed nine points to +38, with one firm in the field reporting orders well above normal for four months
• The non-manufacturers gauge slid to +23 from +29, its weakest since November 2024
• Food producers declined 15 points to minus 40, while retailers as well as information and communications firms each dropped to +8
• Manufacturers anticipate a modest improvement to +23 over three months, while non-manufacturers foresee a further slip to +21

A Reuters poll revealed that confidence among major Japanese manufacturers climbed in October to its highest point in almost five years, underpinned by brisk semiconductor demand. In contrast, service sector sentiment suffered a sharp decline due to rising costs, higher interest rates, and weaker household spending.

The manufacturers index inched up to +22 from +21 in September, matching the level recorded in December 2021. Leading the advance was the precision machinery sector, encompassing some chip equipment makers, which jumped nine points to +38. One firm in this field noted that orders for semiconductors had been approximately one and a half times typical levels for four months. Another machinery company reported robust orders and shipments for chip-related items. Meanwhile, metal products rose nine points to +35, while the steel and nonferrous metals sector rebounded to +25 from minus 13.

Beyond manufacturing, conditions were notably weaker. The non-manufacturers gauge slid to +23 from +29, its weakest since November 2024. Food producers experienced the largest drop, down 15 points to minus 40, as higher raw material expenses and soft consumer demand squeezed margins. Information and communications companies went to +8 from +21, retailers to +8 from +18, and real estate and construction to +28 from +37. Survey respondents blamed higher interest rates, rising construction costs, and softer household spending. A manager at a property firm said climbing borrowing and building costs made investment more challenging.

Wholesalers bucked the trend, advancing to +30 from +24, supported by greater demand for construction materials linked to disaster recovery.

Over the next three months, manufacturers see a slight improvement to +23, whereas non-manufacturers project a further decline to +21. Some manufacturers cautioned that demand tied to artificial intelligence might eventually fade, and service providers reported that inflation was reducing household spending power.

The indices are derived by deducting the proportion of pessimistic replies from optimistic ones. The poll, a key early signal for the Bank of Japan's quarterly Tankan, ran from 18 September to 2 October, gathering responses from just over 200 of some 500 companies contacted.

The findings emerge as the central bank evaluates the tempo of additional tightening following its September rate hike to 1.25%. The expanding gap between export-oriented manufacturers and domestic services is expected to strengthen arguments for a cautious, step-by-step strategy.

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