The Tankan Large Manufacturing Outlook remains a key gauge of Japan’s industrial health. The September 2025 reading of 12 matches the March 2025 figure but falls short of the 13-point consensus forecast. This steady yet subdued sentiment contrasts with the more optimistic 14 readings recorded in mid-2024, signaling a plateau in manufacturing confidence amid persistent external and domestic headwinds.

Drivers this month

• Global demand softness, especially from China and Europe, dampening export orders.
• Supply chain normalization post-pandemic, reducing bottlenecks but limiting upside surprises.
• Rising input costs, particularly energy and raw materials, squeezing margins.

Policy pulse

Monetary policy remains accommodative with the Bank of Japan maintaining its yield curve control and ultra-low interest rates. Inflation hovers near 3%, above the BOJ’s 2% target, but wage growth remains modest, limiting domestic demand strength. Fiscal stimulus continues but with a focus on targeted infrastructure and green investments rather than broad-based spending.

Market lens

Immediate reaction: The Japanese yen (JPY) strengthened slightly against the US dollar post-release, reflecting cautious optimism. The 2-year JGB yield held steady near 0.25%, while equity markets showed muted response, with the Nikkei 225 fluctuating within a narrow range.

Japan’s manufacturing outlook is influenced by core macroeconomic indicators that shape demand and supply conditions. The Tankan index’s stable 12 reading aligns with recent GDP growth of 1.20% annualized in Q2 2025 and a steady unemployment rate near 2.50%. Inflation remains elevated at 3.10% YoY, driven by energy and food prices, while wage growth lags at 1.50% YoY.

Monetary Policy & Financial Conditions

The Bank of Japan’s continued commitment to yield curve control keeps borrowing costs low, supporting capital investment. However, global tightening by other central banks pressures the yen and export competitiveness. Financial conditions are thus balanced between domestic easing and external tightening.

Fiscal Policy & Government Budget

Japan’s fiscal stance remains moderately expansionary, with a 2025 budget deficit forecast near 4.50% of GDP. Government spending prioritizes digital transformation and decarbonization, which may boost manufacturing sectors tied to advanced technologies but offers limited short-term stimulus to traditional heavy industries.

External Shocks & Geopolitical Risks

Geopolitical tensions in East Asia and supply chain disruptions from intermittent lockdowns in China weigh on export outlooks. Additionally, global commodity price volatility and US-China trade frictions add uncertainty to Japan’s export-dependent manufacturing base.

Historical comparisons show the index’s resilience despite external shocks. The 12 reading matches the March 2025 figure and is well above the 8 recorded in December 2023, underscoring a recovery trend since late 2023. However, the failure to surpass the 14-level highs from mid-2024 signals caution among manufacturers.

Market lens

Immediate reaction: The Nikkei 225 index dipped 0.30% within the first hour post-release, reflecting investor caution. The USD/JPY pair edged down 0.20%, indicating safe-haven flows into the yen amid uncertainty. Breakeven inflation rates remained stable, signaling steady inflation expectations.

Looking ahead, the Tankan Large Manufacturing Outlook suggests a cautious but stable manufacturing environment for Japan. The balance of risks points to a range-bound scenario with potential for modest improvement if global demand recovers and supply chain issues ease further.

Bullish scenario (30% probability)

• Global economic rebound, especially in China and the US, boosts export orders.
• Energy prices stabilize, reducing input cost pressures.
• Technological investments and green transition accelerate, lifting manufacturing productivity.
• Index rises to 15+ by Q1 2026.

Base scenario (50% probability)

• Steady but slow global growth maintains current demand levels.
• Input costs remain elevated but manageable.
• Monetary and fiscal policies continue to support moderate growth.
• Index remains near 12–13 through early 2026.

Bearish scenario (20% probability)

• Geopolitical tensions escalate, disrupting supply chains.
• Global recession risks materialize, weakening export demand.
• Inflation spikes force BOJ to tighten policy prematurely.
• Index falls below 10 by mid-2026.

Policy pulse

Monetary policy is expected to remain accommodative in the near term, but the BOJ faces pressure to adjust if inflation persists above target. Fiscal measures will likely focus on structural reforms rather than stimulus, limiting immediate upside.

The Tankan Large Manufacturing Outlook’s steady reading at 12 reflects a manufacturing sector in cautious equilibrium. While the recovery from pandemic lows is clear, the inability to surpass mid-2024 highs signals persistent headwinds. Japan’s manufacturers face a complex mix of global demand uncertainty, cost pressures, and structural shifts toward technology and sustainability.

Policymakers must balance inflation control with growth support, while firms navigate geopolitical risks and evolving supply chains. The outlook suggests moderate growth with downside risks, underscoring the need for vigilance and adaptability in Japan’s industrial strategy.

Since 2020, the Tankan Large Manufacturing Outlook and the Nikkei 225 index have shown a strong positive correlation, with a correlation coefficient near 0.75. Periods of rising Tankan readings, such as mid-2021 and mid-2024, corresponded with significant rallies in the Nikkei 225. Conversely, dips in the Tankan index during early 2023 aligned with market corrections. This relationship underscores the Tankan’s role as a leading indicator for Japan’s equity market performance.