Japan’s manufacturers see the sharpest confidence drop in three years as oil shocks and supply disruptions bite, while domestic sectors remain more resilient.

Summary:

• apan manufacturers’ sentiment posts biggest drop in over three years
• Oil shock and supply disruptions from Iran war hit confidence
• Chemicals sector flips negative as input costs surge
• Non-manufacturers remain resilient on domestic demand
• Outlook weakens, with further deterioration expected by July

Japanese manufacturing sentiment suffered its sharpest decline in more than three years in April, as the Iran war-driven energy shock and supply disruptions weighed heavily on business confidence.

The latest Reuters Tankan survey showed manufacturers’ sentiment fell 11 points to +7, marking the largest monthly drop since January 2023 and the first contraction in three months. The deterioration highlights how quickly geopolitical tensions are feeding through to industrial activity, particularly via higher oil prices and disrupted supply chains linked to the Strait of Hormuz.

Japan’s heavy reliance on Middle Eastern energy, accounting for roughly 95% of its oil imports, leaves its manufacturing sector especially exposed to external shocks. Materials industries were among the hardest hit, with chemicals sentiment turning negative at -8 from +21 previously, as firms reported rising raw material costs and increasing difficulty securing inputs.

Corporate feedback pointed to growing operational strain. Companies highlighted unstable procurement conditions and constraints on shipments due to limited supply of oil-derived materials. In some cases, firms are already reassessing production and sales plans for the remainder of the year amid uncertainty over energy availability.

Other manufacturing segments showed more resilience, with transport machinery, including autos, posting a more moderate decline. However, the broader tone across the sector reflects rising caution as cost pressures build and visibility deteriorates.

In contrast, non-manufacturing sentiment improved to +31, supported by steady domestic demand in construction, real estate and services. Respondents pointed to ongoing capital expenditure and resilient housing activity as key supports, even as input costs rise.

Looking ahead, the outlook remains fragile. Manufacturers expect sentiment to fall further to +2 by July, while non-manufacturers also see a moderation in conditions. Much will depend on the duration of the Iran conflict, with firms warning that prolonged disruption could delay investment decisions and weigh more broadly on economic activity.

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For markets, the data reinforces Japan’s vulnerability to energy shocks, with weaker manufacturing sentiment highlighting downside risks to growth and industrial output. The divergence between softening factory activity and resilient domestic sectors suggests a more uneven economic outlook, potentially complicating policy signals for the Bank of Japan. The reliance on imported energy also keeps the yen sensitive to oil price moves, while prolonged disruption risks further weighing on corporate investment and export momentum.