BOJ Tankan Shows Japanese Manufacturers More Confident as Yen Assumptions Weaken

Japanese manufacturers became more confident in September, with the Bank of Japan’s Tankan survey showing improvement across large, medium-sized and small producers even as sentiment among large service-sector companies eased. The business-conditions diffusion index for large manufacturers rose to 24 from 22 in June, while the reading for medium-sized manufacturers climbed to 23 from 17 and the small-manufacturer index increased to 14 from 9.

The currency assumptions behind corporate plans also moved toward a weaker yen. Companies now expect an average exchange rate of ¥154.23 per U.S. dollar for fiscal 2026, compared with ¥152.57 in the June survey. For the second half of the fiscal year, the assumed rate shifted to ¥154.00 from ¥152.51. A higher yen-per-dollar figure means firms are planning around a weaker Japanese currency than they were three months ago.

The September Tankan, released Thursday, covered 9,104 companies and had a 99.4% response rate. Responses were collected from August 26 through September 30. Across all companies and industries, the business-conditions index rose to 21 from 18, but the split between manufacturing and nonmanufacturing businesses shows that the improvement was not uniform.

Manufacturer sentiment improved across company sizes

The Tankan diffusion index measures the percentage of companies describing business conditions as favorable minus the percentage calling them unfavorable. Among large manufacturers, 30% of respondents rated conditions favorable and 6% unfavorable, producing the headline reading of 24. The June reading had been 22.

The gain was broader than the large-company number alone suggests. Medium-sized manufacturers posted a six-point increase to 23, and small manufacturers improved five points to 14. Capacity readings moved in the same direction. For large manufacturers, the production-capacity index shifted to minus 2 from zero. Negative readings indicate more firms see capacity as insufficient than excessive, which is consistent with firmer operating conditions.

Still, the survey does not point to an uninterrupted acceleration. For December, large manufacturers expect their business-conditions index to fall to 21, while medium-sized and small manufacturers forecast readings of 18 and 12, respectively. Those projections remain positive but show companies anticipating some loss of momentum later in the year.

Nonmanufacturing sentiment was softer. The index for large nonmanufacturers slipped to 35 from 37, and the medium-sized reading fell to 24 from 26. Small nonmanufacturers were unchanged at 15. Construction remained strong among large companies, while retailing, transportation and some consumer-facing services were less upbeat. The contrast matters because it keeps the September report from reading as a broad-based surge in corporate confidence.

Weaker yen assumptions came with brighter profit forecasts

The yen shift is one of the clearest changes in the September survey. The average fiscal 2026 dollar assumption across companies moved about ¥1.66 weaker from the June survey. Among exporting businesses within large manufacturing companies, the assumed dollar rate rose to ¥153.79 from ¥151.49. The Tankan does not establish that the currency change caused the improvement in manufacturer confidence, but the two developments sit together in the latest corporate planning assumptions.

A weaker yen can lift the yen value of overseas revenue and profits for exporters, but it can also increase the cost of imported fuel, raw materials and components. The survey shows some easing in reported input-price pressure among manufacturers, although costs remain elevated. The input-price diffusion index for large manufacturers declined to 59 from 62, and the small-manufacturer reading fell to 71 from 76. Large manufacturers’ output-price index held at 40.

Profit expectations improved sharply. For large manufacturers, current profits are now forecast to rise 13.6% in fiscal 2026 from the previous fiscal year. In the June Tankan, the same group had expected a 6.7% decline. Their sales forecast also strengthened, with expected fiscal-year sales growth rising to 7.6% from 4.0% in June.

Capital-spending plans remain firm as well. Fiscal 2026 fixed investment including land purchases is expected to increase 11.6% among large manufacturers. Across manufacturers of all sizes, the expected increase is 8.3%. The survey’s employment index also continued to show widespread labor shortages: the all-company reading fell to minus 38 from minus 37, and small companies registered minus 42. In this index, a more negative reading signals a larger balance of companies reporting insufficient staff.

The Tankan adds context after the BOJ’s September rate increase

The survey arrives less than two weeks after the BOJ raised its policy rate. At its September 17-18 meeting, the central bank voted 7-2 to guide the uncollateralized overnight call rate to around 1.25%, with the new guideline effective from September 24. The BOJ said Japan’s economy had recovered moderately and that financial conditions remained accommodative, while also highlighting upward price pressure from crude oil, global demand related to artificial intelligence and yen depreciation.

The Tankan offers evidence of solid corporate conditions after that move, but it also shows why the policy outlook is not one-dimensional. Firms report rising borrowing costs: the diffusion index for changes in loan interest rates increased to 68 from 61 across all companies, meaning a larger balance of respondents said loan rates were rising rather than falling. At the same time, the financial-position index stayed at 11 and the lending-attitude index remained at 13, suggesting companies still generally view financing conditions as manageable.

Inflation expectations in the Tankan were little changed to slightly lower for the corporate sector as a whole. Companies expect general prices to rise 2.6% one year ahead, down from 2.7% in June. Their three-year expectation remained at 2.6%, while the five-year estimate edged down to 2.5% from 2.6%. Within large manufacturing, the one-year general-price expectation stayed at 2.3%, while the three-year estimate rose to 2.3% from 2.2%.

The BOJ’s Summary of Opinions from the September meeting, also released October 1, showed policymakers debating how quickly to continue reducing monetary accommodation. Several opinions emphasized upside risks to prices and the need for further rate increases if economic and financial conditions remain consistent with the Bank’s outlook, while others argued that growth and inflation were not strong enough to justify moving too quickly.

The next BOJ monetary policy meeting is scheduled for October 29 and 30. By then, policymakers will be weighing the stronger manufacturing readings against softer large-company service sentiment, higher reported loan rates, persistent labor shortages and the corporate sector’s new assumption that the yen will average roughly ¥154 to the dollar over fiscal 2026.