Japan's Manufacturing Sentiment Holds Steady, Buoyed by Strong Chip Demand
Claire Weston
Reuters' July Tankan shows Japan's manufacturing sentiment holding at +13, propped up entirely by a semiconductor order surge; non-manufacturing plunged from +32 to +25 as Middle East conflict, a weak yen, and rising rates squeezed costs from three sides.
Manufacturing held steady — what kept it there?
The July manufacturing sentiment index stayed at +13, unchanged from June — no improvement, no deterioration.
The sole support came from semiconductors: memory-chip demand rebounded, AI-server orders expanded fast, and electronic-component orders showed broad-based growth.
This means → the entire manufacturing sector's "not falling" rests on one leg — chips. Other industries contributed nothing incremental.
How hot are chip orders, exactly?
A precision-machinery executive said bluntly: "Order volumes and order values have reached unprecedented levels — we are worried about whether capacity is sufficient."
In plain terms = not "business is decent" — orders are so strong the factory fears it cannot keep up.
This reflects global AI-infrastructure buildout funnelling demand into Japan's upstream component suppliers.
Why did non-manufacturing suddenly weaken?
Non-manufacturing sentiment fell from +32 in June to +25 — a 7-point drop in a single month.
Three cost shocks hit at once: the U.S.–Iran conflict in the Middle East pushed up energy prices, a weaker yen raised import costs, and higher interest rates added to financing burdens.
Japan's May wholesale price index rose 6.3% year-on-year, a three-year high. This means → the upstream energy shock has already travelled down the supply chain into day-to-day operating costs for service firms.
Has the Middle East actually stabilised?
One services executive said: "There are signs of a resolution in the Middle East, but things have not returned to normal."
The U.S. and Iran reached a preliminary ceasefire in June, yet missile exchanges continue and the situation remains fragile.
In plain terms = the ceasefire was signed, but the shooting hasn't stopped — companies still can't budget as if the risk is cleared.
How does the Bank of Japan read inflation from here?
The BOJ's quarterly Tankan this quarter showed business confidence at an eight-year high and inflation expectations at a record.
Yet the BOJ struck a cautious tone on the inflation outlook last week, warning that the Iran conflict may push more firms to raise prices later this year.
This means → the central bank sees two forces in a tug-of-war — confidence is rising, but so are costs, and the latter may ultimately lift consumer prices.
What comes next?
The manufacturing index is expected to edge up to +14 in October; non-manufacturing is expected to hold at +25.
Executives are assessing the knock-on effects of geopolitical risk and supply-chain disruption.
In plain terms = there is really only one question: can semiconductor demand keep offsetting macro headwinds? If the chip leg weakens too, manufacturing sentiment has no other prop.
Content is for reference only, not financial advice.