Insights 
VT 
Japanese manufacturers exhibited increased caution in June due to worries over U.S. tariffs and weak Chinese demand, according to the Reuters Tankan survey. The manufacturers’ index decreased to +6 in June from +8 in May, with expectations it may fall further to +2 in the coming three months.
Sentiment among non-manufacturers remained at +30 in June but is predicted to lower to +24 by September. Companies expressed concerns about U.S. trade policy, particularly tariffs affecting autos and parts, as a major challenge. A machinery firm noted a delay in client capital expenditures, while a chemical company stated a client relocated production to the U.S. to avoid tariffs. Additional pressures include weak demand from China and rare earth export restrictions.
Service Sector Optimism
Service sector companies showed more optimism, driven by strong IT spending and increased tourism, although rising labour costs and shortages in staffing were identified as issues. The Reuters Tankan, which mirrors the Bank of Japan’s quarterly tankan survey, calculates its indexes by subtracting the percentage of pessimistic responses from optimistic ones. A positive figure indicates that optimists are in the majority.
The Reuters Tankan survey, a monthly gauge of business sentiment among Japanese firms, mirrors the Bank of Japan’s quarterly assessments. In short, it subtracts the percentage of respondents reporting conditions as unfavourable from those saying they are positive, giving a clear-cut indicator. A reading above zero means that more firms are feeling upbeat than downcast. That trend is holding, but only just.
In June, the mood among manufacturers dipped modestly. While still in positive territory, there’s a clear downshift—from +8 to +6—and the expectation is a further retreat to +2 over the next three months. This means that more and more companies are feeling less confident about conditions just around the corner. It’s not hard to understand why: concerns over Washington’s tariff stance are persistent, and Chinese demand, once a dependable source of growth, isn’t holding up.
We’re seeing direct consequences. A machinery firm has reported delays in investment decisions by clients. That alone signals hesitation. When large buyers put their money on hold, it often reflects broader uncertainty. Separately, a chemical firm has observed customers shifting operations to the U.S. entirely—an unmistakable sign that firms are actively working around tariffs. These decisions aren’t theoretical or distant; they’re happening now, and they impact order books and production capacity back in Japan.
Add in the restrictions on Chinese rare earth exports, a critical input for many advanced products, and there’s yet another reason for technical industries to batten down hatches. With certain raw materials harder to come by, pricing pressures rise, leaving less room to manoeuvre for margins already under strain.
Services Sector Steadiness
By contrast, sentiment in the services sector held steady through June. The figure rests at a favourable +30. But here too, forward-looking sentiment indicates a step back, dropping to +24 by September. Enthusiasm has been bolstered by solid IT demand and increased tourist arrivals, both helpful in keeping the domestic economy spinning. But even that tailwind doesn’t mask some of the emerging constraints.
For example, employers are now grappling with rising wage bills due to a tightening labour market. More visitors mean more staff are needed, not less. And where restaurants, hotels, and transport firms can’t recruit fast enough, service quality can suffer—a known risk to repeat business and profitability alike. So even amid strong spending in digital sectors and travel, expansion carries a price.
What this tells us is plain: there’s a widening gap between hopes and expectations in goods-related firms, while services remain more resilient but not immune to pressure. Investors focused on financial contracts must take this divergence into account immediately. Pricing reflects future conditions, not current ones. If client investment is reticent in key sectors and input costs may rise unpredictably, any strategy that bets on stability in industrials could be caught off guard.
From our positioning, we watch for forward indicators such as export orders, capital expenditure projections, and foreign exchange responses to shifting trade policies. These data points, when layered together, provide a better measure than sentiment alone. Some players in local manufacturing may be adjusting production cycles or importing schedules. Sharper volatility in spot prices, or one-off hedging requests for input commodities, often signal what’s just beyond immediate view.
As projections stand, we lean towards the view that direction in service-related contracts may continue to diverge from those linked more directly to traded goods. Labour costs should stay high, but unless domestic consumption takes a hit, they may be absorbed—though not comfortably. Sensitivity to China’s activity levels remains a sharp edge; any glimmer of industrial recovery there could, ironically, introduce positive variability. For now, the tone is wary. They’re not shutting up shop, but doors aren’t swinging open with confidence either. We are watching margin compression and delayed spending decisions much more closely than headlines might suggest.
