Japan's Business Confidence Wanes Amid U.S. Tariffs, China Slowdown

Japanese manufacturers are growing increasingly cautious about the economic outlook, citing uncertainties from U.S. trade tariffs and weak demand from China, according to the latest Reuters Tankan survey. The manufacturers’ sentiment index fell to +6 in June from +8 in May and is expected to drop further to +2 over the next three months, signaling a continued but weakening optimism.

The poll, conducted from June 4–13 with 504 major non-financial firms (220 responded anonymously), mirrors concerns over ongoing trade tensions. Japan remains in negotiations with the U.S. to eliminate tariffs on exports, including the 25% duty on automobiles and auto parts—core to Japan’s economy.

Manufacturing leaders noted reduced capital expenditures and production shifts due to policy uncertainty. A chemicals company revealed that a client had relocated production to the U.S., cutting domestic sales. Meanwhile, a pulp and paper firm raised concerns about China’s rare earth export restrictions, which could disrupt supply chains and demand.

The auto sector, in particular, reported significant reductions in output, attributing it directly to the impact of U.S. tariffs. These pressures have fueled widespread caution among manufacturers.

On the other hand, the service sector held steady, with its sentiment index at +30 in June. Despite expectations of a dip to +24 in the next quarter, optimism remains supported by active IT investments and a rebound in inbound tourism. However, labor shortages and rising wages continue to challenge the sector’s growth potential.

As Japan’s economy navigates geopolitical and supply chain uncertainties, business confidence remains in positive territory—but the trend suggests that economic resilience is being tested. The outlook for the second half of 2025 will likely hinge on trade policy outcomes and stabilization in China’s economic activity.