The Tankan Large Manufacturers Index rose to 14 in September 2025, marking a modest improvement from 13 in June and September 2024. This index, a key gauge of business sentiment among Japan’s largest manufacturers, reflects cautious optimism amid persistent global uncertainties. The reading remains below the 12-month average of 13.10, signaling steady but unspectacular confidence in the manufacturing sector.

Drivers this month

• Steady domestic demand supported production plans.
• Supply chain disruptions eased slightly compared to early 2025.
• Export growth slowed due to weaker global demand, especially from China and Europe.

Policy pulse

The index remains consistent with the Bank of Japan’s (BoJ) cautious stance on monetary easing. Inflation remains below the 2% target, and the BoJ continues yield curve control, limiting upward pressure on borrowing costs.

Market lens

Following the release, the Japanese yen (JPYUSD) strengthened modestly by 0.30%, reflecting improved sentiment in the manufacturing sector. The 2-year JGB yield remained stable near 0.25%, indicating steady financial conditions.

Japan’s Tankan Large Manufacturers Index is a leading indicator of industrial health and business confidence. The September 2025 reading of 14 compares with a low of 1 in April 2023 and a peak of 14 in December 2024, showing a gradual recovery over the past 18 months. The index’s trajectory aligns with core macroeconomic indicators such as GDP growth, industrial production, and export volumes.

GDP and industrial output

Japan’s GDP growth slowed to an annualized 1.10% in Q2 2025, down from 1.50% in Q1, reflecting weaker external demand. Industrial production rose 0.40% MoM in August 2025, supported by domestic consumption and inventory restocking.

Monetary policy & financial conditions

The BoJ’s yield curve control policy remains intact, with short-term rates near -0.10% and 10-year JGB yields capped around 0.50%. Financial conditions are accommodative, but inflation pressures remain subdued at 1.30% YoY as of August 2025.

Fiscal policy & government budget

Japan’s fiscal stance remains expansionary, with the government targeting a 1.20% GDP deficit ratio in FY2025 to support growth and social spending. Infrastructure investments and green energy subsidies are key budget priorities.

Drivers this month

• Improved supply chain reliability contributed 0.50 points.
• Export demand weakness subtracted -0.30 points.
• Domestic capital expenditure plans added 0.20 points.

Policy pulse

The index remains below the pre-pandemic average of 16, suggesting that monetary policy accommodation is still necessary. The BoJ’s commitment to low rates supports manufacturers’ borrowing costs and investment plans.

Market lens

Immediate reaction: USDJPY fell 0.30% post-release, reflecting yen strength amid improved sentiment. Equity markets showed mild gains in manufacturing-related sectors.

Looking ahead, the Tankan Large Manufacturers Index is poised to reflect a balance of risks. The baseline scenario projects a modest rise to 15 by December 2025, supported by steady domestic demand and easing supply constraints. Bullish and bearish scenarios hinge on external shocks and policy shifts.

Bullish scenario (30% probability)

• Global demand rebounds sharply, especially from China and the US.
• Inflation picks up moderately, prompting BoJ to signal gradual policy normalization.
• Manufacturers increase capital spending, pushing the index above 16.

Base scenario (50% probability)

• Steady but slow global growth maintains moderate export demand.
• BoJ maintains current accommodative stance with minor tweaks.
• Index rises modestly to 15, reflecting cautious optimism.

Bearish scenario (20% probability)

• Geopolitical tensions disrupt supply chains and trade flows.
• Global recession fears dampen export orders.
• Index falls back to 12 or below, signaling renewed weakness.

The September 2025 Tankan Large Manufacturers Index reading of 14 underscores a cautiously optimistic manufacturing sector in Japan. While the index shows recovery from pandemic lows, it remains below pre-pandemic peaks, reflecting ongoing challenges from global demand softness and geopolitical risks. Monetary and fiscal policies remain supportive, but the outlook hinges on external developments and domestic inflation dynamics.

Investors and policymakers should monitor the Tankan closely as a barometer of industrial health and economic momentum. The balance of risks suggests a steady but fragile recovery, with potential for upside if global conditions improve or downside if geopolitical tensions escalate.

Key tradable symbols linked to this report include 7203.T (Toyota Motor Corp), reflecting export sensitivity; JPYUSD, capturing currency reactions; BTCUSD, as a risk sentiment proxy; 9984.T (SoftBank Group), linked to tech investment trends; and EURJPY, reflecting regional trade dynamics.