The Reuters Tankan Index, a key gauge of Japanese business confidence, climbed sharply to 17 in November 2025. This is the highest level since April 2025’s 9 and marks a significant rebound from the 8 recorded in October. The index’s upward trajectory over the past six months—from a low of -1 in March to 17 now—indicates improving corporate sentiment amid easing supply chain disruptions and stronger domestic demand.

Drivers this month

• Manufacturing sector optimism rose due to increased export orders.
• Services sector benefited from renewed consumer spending post-COVID restrictions.
• Business investment intentions strengthened, reflecting confidence in stable growth.

Policy pulse

The index reading of 17 sits comfortably above the neutral midpoint, suggesting that firms expect growth to outpace the Bank of Japan’s inflation target of 2%. This may influence the BoJ’s cautious stance on monetary easing, as stronger sentiment could support gradual normalization without derailing recovery.

Market lens

Immediate reaction: The Japanese yen (JPYUSD) strengthened by 0.30% within the first hour of the print, reflecting increased risk appetite and expectations of tighter monetary conditions. The Nikkei 225 index also gained 0.50%, signaling positive investor sentiment.

Core macroeconomic indicators align with the Tankan’s upbeat tone. Japan’s Q3 GDP growth was revised upward to 1.20% QoQ, supported by a 3.50% YoY rise in industrial production. Inflation remains moderate at 1.80% YoY, below the BoJ’s 2% target but trending upward. Unemployment held steady at 2.50%, near historic lows.

Monetary Policy & Financial Conditions

The Bank of Japan continues its Yield Curve Control (YCC) policy, keeping 10-year JGB yields near 0.25%. However, the stronger Tankan reading and improving inflation outlook may prompt the BoJ to signal a gradual tapering of asset purchases in 2026. Financial conditions remain accommodative, with corporate bond spreads tightening by 15 basis points since September.

Fiscal Policy & Government Budget

Japan’s fiscal stance remains expansionary, with the government targeting a 1.50% of GDP increase in public investment for FY2026. The recent stimulus package focuses on green infrastructure and digital transformation, which should bolster medium-term productivity and support business confidence.

External Shocks & Geopolitical Risks

Geopolitical tensions in East Asia, particularly around Taiwan and the Korean Peninsula, pose downside risks. Supply chain vulnerabilities persist but have eased compared to early 2025. The global slowdown in China remains a concern, though Japan’s export diversification mitigates some exposure.

Drivers this month

• Export orders increased by 5.20% MoM, boosting manufacturing sentiment.
• Domestic consumption rose 2.10% MoM, supporting services sector confidence.
• Capital expenditure intentions improved by 3.80% YoY, signaling investment growth.

Policy pulse

The index’s strong rebound suggests that monetary policy accommodation is beginning to translate into real economic gains. The BoJ may consider this data point when reviewing its forward guidance in December.

Market lens

Immediate reaction: The Nikkei 225 index rose 0.50%, while the 2-year JGB yield increased by 4 basis points, reflecting expectations of a gradual policy shift. The USDJPY pair weakened slightly as the yen gained on improved sentiment.

Looking ahead, the Tankan Index’s jump to 17 suggests a cautiously optimistic outlook for Japan’s economy. However, risks remain. We outline three scenarios for the next six months:

Bullish scenario (30% probability)

• Global demand recovers faster, boosting exports by 7% YoY.
• Inflation reaches 2.50%, prompting BoJ to begin policy normalization in Q2 2026.
• Corporate investment accelerates, driving GDP growth above 2% YoY.

Base scenario (50% probability)

• Moderate global growth sustains export growth at 3-4% YoY.
• Inflation gradually approaches 2%, with BoJ maintaining accommodative stance.
• Business confidence remains stable, supporting steady GDP growth near 1.50% YoY.

Bearish scenario (20% probability)

• Geopolitical tensions disrupt supply chains, reducing exports by 2% YoY.
• Inflation stalls below 1.50%, forcing BoJ to extend easing measures.
• Business sentiment deteriorates, slowing GDP growth below 1% YoY.

Data from the Sigmanomics database underpins these scenarios, integrating macroeconomic indicators, policy signals, and external risks. The Tankan Index’s sharp rise is a positive signal but requires confirmation from sustained economic data.

The November 2025 Reuters Tankan Index reading of 17 marks a significant improvement in Japanese business sentiment. This rebound reflects stronger domestic demand, easing supply constraints, and cautious optimism about global trade conditions. While monetary policy remains accommodative, the BoJ faces growing pressure to signal normalization amid improving fundamentals.

Fiscal stimulus focused on innovation and infrastructure supports medium-term growth, but geopolitical risks and external shocks require vigilance. Financial markets have responded positively, with the yen strengthening and equity markets rising. The Tankan Index’s trajectory will be a key barometer for policymakers and investors in the coming months.

Overall, Japan’s economic outlook is improving but remains vulnerable to external shocks. Balanced monitoring of macro indicators and policy signals will be essential to navigate the evolving landscape.