In the Bank of Japan’s Q1 2025 Tankan report, the March index for big manufacturers stood at +12, marking a decline for the first time in a year. The June forecast remains at +12, whereas big non-manufacturers improved to +35, the highest since August 1991, with a June expectation of +28.
Small manufacturers showed an index of +2 in March, an improvement for three consecutive quarters, but this is projected to drop to -1 in June. For small non-manufacturers, March was at +16, with a forecast of +9.
Exchange Rate And Profit Expectations
The report indicates firms expect the dollar to average 147.06 yen and the euro 157.45 yen for FY2025/26. Big manufacturers anticipate a 0.2% recurring profit increase, while their capex is projected to grow by 3.1%. Conversely, small firms expect a 10.0% decrease in capex.
Employment among all firms decreased to -37, with financial conditions slightly worsening from +12 to +10. Additionally, inflation expectations have risen, with firms predicting consumer prices to increase by 2.5% in one year, 2.4% in three years, and 2.3% in five years.
The Reuters Tankan Index has shown fluctuating trends in business sentiment over the preceding quarters, with January seeing a drop in manufacturers’ sentiment, followed by negative readings in February and March, primarily due to uncertainties in global demand and trade issues.
What this tells us – quite plainly – is that confidence among large industrial players has hit a bump. After a string of steady quarters, the March reading slipped. It didn’t collapse, but it did confirm that some momentum has tailed off. The projection sticking at +12 for June isn’t encouraging. It implies firms may be resigned to a plateau, at least near-term. Meanwhile, service-sector giants look to be thriving, or at least moving with purpose. The number hitting levels not seen since 1991 isn’t just noise – it hits at wide demand resilience, possibly driven by post-pandemic consumption and increased domestic activity. Still, the expected dip into June warns us not to read too much forward acceleration into that.
Firms further down the ladder – the smaller ones – aren’t showing a single story. Manufacturing has perked up for three quarters, which says something about recovery trickling through supply chains. But then the June forecast flips that modest optimism entirely. That kind of reversal suggests raw material costs, supply uncertainties, or perhaps weaker-than-hoped orders for Q2. For those trading on forward-moving gauges of activity, these projections often matter more than current reads.
Investment Gaps And Inflation Pressures
The same size divide comes through in investment intentions. The biggest players have pencilled in some capex growth; not overwhelming, but deliberate. It says they’re planning rather than pausing. Smaller outfits moving in the opposite direction – sharply so – underscores their sensitivity to financing costs and the squeeze from wages and input inflation. A 10% cut isn’t just prudence. It’s defensive.
We note too that expected average exchange rates seem broadly steady. Dollar-yen near 147, euro-yen just under 158. That steadiness translates, in our view, to fewer surprises in FX assumptions underpinning forward contracts. However, when expectations remain anchored while inflation ticks higher, as it is in this case, that skew can start to influence pricing decisions and strategy within the futures curve.
Price forecasts from firms have edged upward. A year out they now expect 2.5% inflation, which is above the Bank of Japan’s target and off previous market assumptions. This forces a recalibration. Inflation not only erodes real wages but also shapes forward guidance, impacting swap spreads and rolling strategies across yen-denominated contracts. We should be watching if these expectations push term structure steeper across mid-curve tenors, especially if BoJ is seen taking even a mild tightening step in response.
Employment sentiment remains low across the board – that -37 doesn’t soften the message. Companies may not be cutting yet, but they’re clearly hesitant. That often feeds through to subdued hiring baselines and business-wide caution. Finance conditions worsening, even slightly, hints at some mild tightening – whether from policy reaction or risk appetite within lenders. This directly shapes credit access and has knock-on effects for corporate hedging activity, particularly for small firms reliant on shorter-term rollover funding.
The past three months of the Reuters Tankan index didn’t inspire either. Manufacturing sentiment slipped, turned negative, and stayed there. Global demand uncertainty’s been the headline culprit. That mirrors our experience of market participants having to pare back previously hopeful export-based positions and lower positioning in correlation trades that rely on broad synchrony in global recovery.
There’s no singular story here, but the data combination – stabilising currency views, increased long-run inflation expectations, split capex intentions, weakening employment – is giving us quite a few ingredients. How we thread them together in tactical positioning matters now.
