Japan manufacturing sentiment improves second consecutive month, services sector stable

Japan’s manufacturing sector showed signs of steady recovery in February, with sentiment improving for the second straight month, according to the latest Reuters Tankan survey.

• The manufacturers’ sentiment index rose to +3, up from +2 in January, marking its highest level since November.
• Further improvement is expected in the coming months, with the index projected to rise to +5 by May.

This gradual recovery has been driven by stronger sentiment in the food and chemicals industries, as firms report some relief from surging material costs and a stabilization in the yen’s depreciation. However, not all sectors shared the optimism—industries like paper, pulp, and steel continued to struggle with deteriorating sentiment.

Meanwhile, sentiment in Japan’s service sector remained strong but edged slightly lower, with the index dipping to +30 in February from +31 in January.

• This level is expected to hold steady through May.

The construction and real estate sectors saw the biggest declines, as rising labor costs squeezed profit margins. Some business leaders also voiced concerns over potential economic headwinds, including the impact of U.S. trade policy under President Donald Trump, escalating Sino-U.S. trade tensions, and uncertainty in China’s economic outlook.

The survey results align with Japan’s latest economic data, which showed the economy expanding at an annualized rate of 2.8% in the October-December quarter—outpacing expectations—driven by strong business investment and a surprising uptick in consumer spending. However, uncertainties in global trade and rising domestic costs could pose challenges in sustaining this growth momentum in the coming months.

The Reuters Tankan survey was conducted between February 4-14 by Nikkei Research

• responses from over 230 large Japanese non-financial firms

This article was written by Eamonn Sheridan at www.forexlive.com.