Japan's June BOJ Tankan Shows Significant Improvement in Large Manufacturers' Business Conditions, While Capital Expenditure Intentions Remain Strong

Overview

This report analyzes the Bank of Japan's June Tankan survey. The core conclusion is that the large manufacturers' business conditions DI improved significantly and exceeded expectations, while large non-manufacturers also improved modestly; corporate profit outlooks were revised downward due to costs and geopolitical disruptions, but capital expenditure plans were sharply revised higher in line with the usual pattern observed in the June survey. Goldman Sachs believes the results support the BOJ's view that the risk of a substantial economic downturn has diminished and that the corporate sector is unlikely to deteriorate materially in the near term.

Core views

First, the improvement in large manufacturers' business conditions was stronger than market expectations, with improvements in 10 manufacturing subsectors; nonferrous metals, steel, production machinery, business-use machinery, and chemicals performed well. Second, overall non-manufacturing conditions remain strong, but the September forward-looking DI shows a significant deterioration in expectations among large non-manufacturers and SMEs, possibly reflecting caution regarding yen depreciation and rising oil-related prices. Third, capital expenditure demand continues to be driven by labor shortages, digitalization, environmental initiatives, and equipment replacement, with software investment plans revised notably higher. Fourth, input prices are rising rapidly while output prices continue to increase, and corporate inflation expectations have edged higher; the speed and extent of upstream cost pass-through to downstream prices warrant attention.

Analysis framework

The report focuses on the BOJ Tankan survey's business conditions DI, price DI, employment conditions DI, current profit outlook, capital expenditure plans, and corporate inflation expectations. It compares the June readings with the March readings, market expectations, Goldman Sachs forecasts, and the September outlook, and assesses business conditions, profit pressures, investment intentions, and inflation pass-through across manufacturers, non-manufacturers, large companies, and SMEs.

Methodology notes

• macro_surveyBOJ Tankan diffusion index

  Business conditions DI

  The Tankan DI measures business conditions as the difference between the share of companies that consider conditions favorable and the share that consider them unfavorable. The report uses the actual June value, the March value, and the September outlook to assess changes in corporate confidence.

• price_pressureinput-output price DI comparison

  Comparison of input and output price DIs

  By comparing the diffusion indices for increases in input prices and output prices, the report evaluates companies' ability to pass through costs and the potential pressure for inflation transmission.

• investment_cyclecapex plan revision pattern

  Capital expenditure plan revision pattern

  The report compares the upward revision of June capital expenditure plans relative to the initial March plans with the seasonal pattern of typically large upward revisions in June surveys since 2012.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Japanese macroeconomy

  Directly relevant

  Strengths

  Both large manufacturers' and non-manufacturers' DIs exceeded expectations, while capital expenditure plans were sharply revised higher, indicating that business conditions in the corporate sector remain favorable.

  Weaknesses

  The September outlook DI deteriorated and FY2026 profit expectations were revised downward, indicating that costs and external disruptions continue to weigh on corporate confidence.

  Comparison

  The improvement among large manufacturers was significantly stronger than market expectations; the improvement among non-manufacturers was smaller, but the absolute level remained high.

  Risks

  The Middle East situation, higher crude oil prices, yen depreciation, and incomplete cost pass-through.

• Japanese manufacturing

  Highly relevant

  Strengths

  The large manufacturers' DI rose to +22, with 10 of 16 manufacturing industries improving; steel, nonferrous metals, and production machinery performed strongly.

  Weaknesses

  Input prices are rising faster than output prices, and the FY2026 current profit outlook was revised downward.

  Comparison

  Large manufacturers improved more than small and medium-sized manufacturers, while improvement in the latter's processing industries was limited.

  Risks

  Supply chain disruptions, energy costs, and uncertainty in external demand.

• Japanese non-manufacturing

  Highly relevant

  Strengths

  The large non-manufacturers' DI rose to +37, with notable improvements in accommodation and food services and retail.

  Weaknesses

  The September outlook DI fell 9 points, with electricity and gas, utilities, construction, and real estate weakening.

  Comparison

  Current non-manufacturing conditions are strong, but the degree of forward-looking caution is higher than in manufacturing.

  Risks

  Yen depreciation, higher oil-related product prices, and labor shortages.

• Japanese interest rates and monetary policy

  Indirectly relevant

  Strengths

  Resilient corporate conditions and capital expenditure support the BOJ's view that the risk of a substantial economic downturn has diminished.

  Weaknesses

  Downward revisions to profits and deterioration in the forward-looking DI could constrain the pace of policy tightening.

  Comparison

  Slightly higher inflation expectations and continued increases in output prices keep policy attention focused on price pass-through.

  Risks

  If cost-push inflation accelerates while corporate profits come under pressure, the policy trade-offs will become more complex.

Key data

• Large manufacturers' June business conditions DI+22Up 5 points from +17 in March, above the Goldman Sachs and market expectations of +16, and the highest level since March 2018.
• Large manufacturers' September outlook DI+17Down 5 points from the June actual reading, indicating greater caution about the near-term outlook.
• Large non-manufacturers' June business conditions DI+37Up 1 point from +36 in March, above the market expectation of +36, and in line with the Goldman Sachs forecast of +37.
• Large non-manufacturers' September outlook DI+28Down 9 points from the June actual reading; the report believes that non-manufacturers are typically more cautious and may be affected by concerns about yen depreciation and rising oil-related prices.
• FY2026 current profit outlook for large manufacturers-6.7%Revised down from the initial March outlook of -2.1%.
• FY2026 current profit outlook for large non-manufacturers-6.3%Revised down from the initial March outlook of -1.4%.
• Large companies' all-industry FY2026 capital expenditure plans+11.5%Sharply revised up from the initial March plan of +3.3%.
• Large companies' software investment plans+13.1%Revised up from the initial March plan of +2.3%, reflecting investment demand to address labor shortages and other challenges.
• Corporate one-year inflation expectations+2.7%Average across all company sizes and industries, revised up 0.1 percentage point from March.
• Corporate three-year and five-year inflation expectations+2.6% / +2.6%Both revised up 0.1 percentage point from March; the five-year expectation among SMEs was revised up 0.2 percentage point.

Impact & implications

The Tankan results reinforce the view that Japan's corporate sector remains resilient, supporting the BOJ's continued assessment that the risk of a substantial economic downturn has diminished. Robust capital expenditure, particularly software investment, indicates that autonomous investment demand related to labor shortages and digitalization continues to support growth; at the same time, rising input prices and higher corporate inflation expectations mean that price pass-through remains an important variable to monitor for monetary policy and corporate margins.

Risks

• The Middle East situation could disrupt supply chains and raise input costs.
• Higher crude oil prices could push up input prices, while costs have not yet been fully passed through to output prices.
• The trend of yen depreciation and higher oil-related product prices could make non-manufacturers and SMEs more cautious about their outlook.
• The downward revision to the FY2026 current profit outlook indicates that corporate earnings remain under pressure.
• Although labor shortages have eased slightly, the employment conditions DI remains at a severe shortage level.

What to watch

• Whether the September Tankan outlook DI materializes, particularly the extent of deterioration among large non-manufacturers and SMEs.
• The speed and extent of pass-through from rising input prices to downstream output prices.
• Whether five-year corporate inflation expectations continue to rise, particularly among SMEs.
• Whether FY2026 capital expenditure plans remain strong and software investment plans continue to be revised higher.
• The impact of the Middle East situation, crude oil prices, and the yen exchange rate on corporate profits and business conditions.
• Whether the BOJ continues to use resilience in corporate conditions as a basis for policy normalization.