The Bank of Japan's quarterly Tankan business survey showed confidence among major manufacturers unexpectedly posted a slight pickup, led by steel mills, oil refineries and paper/pulp makers thanks to lower materials costs, while producers of vehicles, metals and general machinery suffered a modest setback in the face of Trump tariffs on vehicles, metals and other goods.

Sentiment among major non-manufacturers marked a slight dip from March, as largely expected, amid labor shortages and high import costs. It was led by goods rental/leasing and real estate firms. Retailers as well as hotels/restaurants saw their sentiment slip as a firmer yen and stricter duty-free shopping rules led to lower spending by visitors from other countries.

The diffusion indexes on business conditions (the percentage of firms reporting improvement minus that of firms reporting deterioration) are as follows:
--Large manufacturers: 13 vs. 12 in Mar, 14 in Dec, 13 in Sept, 13 in June 2024 (the first rise in two qtrs)
--Large non-manufacturers: 34 vs. 35 in Mar, 33 in Dec, 34 in Sept, 33 in June 2024 (the first drop in 2 qtrs)
--Smaller manufacturers: 1 vs. 2 in Mar, 1 in Dec, 0 in Sept, -1 in June, -1 in Mar 2024, 1 in Dec 2023 (the first drop in 5 qtrs)
--Smaller non-manufacturers: 15 vs. 16 in Mar, 16 in Dec, 14 in Sept, 12 in June, 13 in Mar 2024(the first fall in 4 qtrs)

Major firms projected their plans for business investment in equipment and software would rise a combined 11.5% (above the consensus forecast of a 8.4% gain) on the year in fiscal 2025 ending in March 2026, up from +3.1% (the first estimate) in the March. Capex plans are generally supported by demand for automation amid labor shortages as well as government-led digital transformation and emission control.

Smaller firms revised up their combined capital spending plans to a 5.6 decrease (also firmer than the consensus call of a 7.9% fall) from -10.0 (the first estimate) about three months earlier. Small and medium firms tend to have conservative plans at the start of each fiscal year and revise them up later.

BOJ policymakers will analyze this and other pieces of data ahead of their next policy meeting on July 30-31, when the board will update their medium-term growth and inflation forecasts. They will discuss whether the uncertainty over trade rows and geopolitical risks have eased enough for them to consider raising interest rates.

Key forecasts:
--The Bank of Japan’s quarterly Tankan business survey is forecast to show confidence was flat or deteriorated in most categories in the June quarter, hit by Trump tariffs on vehicles, metals and other goods, with automakers lowering export prices to pay for higher import costs for U.S. customers. High costs of living are keeping households wary, hurting retailers, while construction and transport firms are saddled with labor shortages. Looking ahead, firms tend to be cautious about three months ahead but they may be more optimistic over trade talks with Washington.

The diffusion index on business conditions (the percentage of firms reporting improvement minus that of firms reporting deterioration)
--Large manufacturers: 10 vs. 12 in Mar, 14 in Dec, 13 in Sept, 13 in June 2024 (the second straight drop)
--Large non-manufacturers: 35 vs. 35 in Mar, 33 in Dec, 34 in Sept, 33 in June 2024, 30 in Dec 2023 (flat after the first drop in 2 qtrs)
--Smaller manufacturers: -1 vs. 2 in Mar, 1 in Dec, 0 in Sept, -1 in June, -1 in Mar, 1 in Dec 2023 (the first drop in 5 qtrs)
--Smaller non-manufacturers: 15 vs. 16 in Mar, 16 in Dec, 14 in Sept, 12 in June (the first fall in 4 qtrs)

--Major firms are expected to project their plans for business investment in equipment and software would rise a combined 8.4% on the year in fiscal 2025 ending in March 2026, up from +3.1% (the first estimate) in the March. Capex plans are generally supported by demand for automation amid labor shortages as well as government-led digital transformation and emission control.

--Smaller firms are also likely to revise up their combined capital spending plans to a 7.9% decrease from -10.0 (the first estimate) about three months earlier. Small and medium firms tend to have conservative plans at the start of each fiscal year and revise them up later.

The Tankan survey, which is conducted quarterly by the Bank of Japan, is considered the most complete reading of Japan's economic performance. The Tankan surveys individual components of the economy such as large and small manufacturing and nonmanufacturing enterprises. A key component of the survey deals with capital expenditures (CAPEX) going forward.

The Bank of Japan's Tankan survey is considered one of the most important indicators of the economy's health and helps the Bank of Japan determine monetary policy. It is widely used by investors to determine future investments in Japan. Firms are asked questions that cover a wide range of topics including the future direction of capital expenditure and pricing as well as the corporate outlook towards employment and the overall economy.

The data are broken down by large, medium and small manufacturers as well as the non-manufacturing sectors. A key number to watch is the all industries capital expenditure or CAPEX measures capital expenditure by all Japanese industries except the financial industry. The large manufacturers' index reflects the large international companies while the small manufacturers' index is reflects the domestic economy.