Japanese factory confidence near five-year high on chip-driven Reuters Tankan rise

The latest Reuters Tankan reading strengthens the argument for further Bank of Japan policy normalisation, as manufacturer confidence reached its highest point since December 2021, with both current and outlook indices improving. This broad-based uptick, not concentrated in any single sector, gives the BOJ greater ability to ignore short-term fluctuations when assessing its own quarterly Tankan and upcoming rate decisions. The yen could see slight support from expectations of a firmer BOJ policy path, but the poll's identified risks — Middle East tensions, rising input costs and weak domestic consumption — should limit any significant move. The Nikkei 225 might draw some support from the implication of healthy corporate conditions, but gains could be restrained by the same BOJ normalisation expectations that are boosting the yen. Market participants will view this survey as a precursor to the official BOJ Tankan rather than a standalone trading event.

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Japanese manufacturers are at their most optimistic in nearly five years, as demand for AI chips spreads through the supply chain.

Summary

• The Reuters Tankan manufacturing index increased to +21 in September, up from +18 in August, reaching its highest point since December 2021.
• The non-manufacturing index inched up to +29 from +28, remaining in the range seen throughout 2025 and into 2026.
• Manufacturers' three-month outlook stands at +27, while non-manufacturers' outlook holds at +27.
• The poll ran from 26 August to 4 September, with 224 of 510 companies responding.
• The electronics sub-index jumped to +39 from +24, driven by demand from data centres and semiconductors; steel and nonferrous metals remained negative at -13.
• Real estate and construction rose to +37, transport and utilities increased to +33, and information and communications fell to +21.

According to a Reuters monthly poll released on Wednesday, business confidence among large Japanese manufacturers rose in September to its highest since December 2021, underpinned by strong demand for semiconductors and data centres. The Reuters Tankan manufacturer sentiment index climbed to +21 from +18 in August, continuing a gradual recovery from +7 in April. Non-manufacturer sentiment increased slightly to +29 from +28, staying within the band that has persisted through 2025 and into this year.

The survey, which serves as a leading indicator for the Bank of Japan's quarterly Tankan, was conducted between 26 August and 4 September, with 224 of 510 companies responding. The index is derived by subtracting the proportion of pessimistic replies from optimistic ones; a positive figure therefore indicates net optimism among those surveyed.

The manufacturing gain was driven primarily by electronics, where the sub-index surged to +39 from +24 in the previous month. A manager from an electronics company cited in the poll stated that demand related to data centres continues to be very robust, reflecting a surge of AI-related capital expenditure reaching Japanese suppliers of semiconductors, testing gear and associated parts. Precision machinery remained at +29, while metal products inched up to +26 from +25. Textiles and paper pulp moved to +13 from zero, but steel and nonferrous metals stayed negative at -13.

In non-manufacturing, real estate and construction increased to +37 from +32, while transport and utilities rose to +33 from +25. Information and communications fell to +21 from +33, and retailers recovered to +18 from +9. A property company manager noted that landlords have kept pushing through rent hikes, indicating ongoing pricing strength in real estate despite worries about rising borrowing costs.

Over the next three months, manufacturers anticipate sentiment rising to +27, while non-manufacturers expect their index to stay at +27. Respondents identified Middle East tensions, raw material costs and weaker domestic consumption as the primary downside risks to this forecast. As a closely followed indicator ahead of the BOJ's official Tankan, the survey's consistent and broad improvements provide policymakers with a clearer picture of business conditions before their next quarterly evaluation, supporting the view that corporate confidence, especially the AI-related capital investment cycle, has kept strengthening through the latter half of the year.

Sidebar: Comparing the Reuters Tankan and the Bank of Japan Tankan

• Bank of Japan Tankan: This official quarterly survey is run directly by the BOJ and covers about 9,000 to 10,000 companies in manufacturing and non-manufacturing. It is published four times a year, usually in early April, July, October and January, and carries the most market significance as it directly informs the BOJ's policy decisions.
• Reuters Tankan: A private monthly survey conducted by Reuters, covering a narrower panel of large companies (about 500 firms, with 224 responding in this instance). Its methodology and questions are similar to the BOJ survey, so it is viewed as a leading indicator or proxy for the official release.

How they relate: Since the Reuters poll is conducted monthly and has a tighter, more recent time frame than the BOJ's quarterly survey, it is used as an early indicator of the direction the next official Tankan may take, not as a replacement. A trend of rising or falling readings over two or three Reuters Tankan releases before a BOJ Tankan is often interpreted as a sign of where the official index might go, though the smaller sample and private methodology can cause divergence, especially at turning points or when sentiment varies across sectors. The BOJ Tankan remains the benchmark for policy purposes; the Reuters Tankan is best regarded as a directional signal between official releases.

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