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Japanese Factory Sentiment Improves Modestly in May but Auto Sector Weakness Caps Rebound, Reuters Tankan Shows

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Sentiment among Japanese factory managers improved slightly in May, driven by a recovery in commodity-linked industries from a contraction the previous month caused by the Iran war.

However, weakness in the automotive sector and several other industries prevented a stronger rebound, according to the Reuters Tankan poll.

The monthly survey, which serves as a leading indicator for the Bank of Japan's quarterly Tankan, showed manufacturers' sentiment edging up to plus 8 in May from April's plus 7, though this remained well below March's four-year high of plus 18.

Materials industries showed improvement, with their index rising to plus 5 from minus 3, while chemicals recovered to plus 6 from minus 8 and steel and nonferrous metals climbed to a zero reading from minus 25.

A chemicals company manager attributed the optimistic outlook to "front-loaded demand due to the Middle East situation," and a ceramics firm respondent noted a similar pattern.

The transport machinery sector, encompassing Japan's automakers and their extensive supplier network, saw its confidence halve to plus 10 from plus 20, extending a sharp decline from plus 36 in March.

Food processors remained the weakest manufacturing segment, with their index falling to a six-year low of minus 40 from minus 25, while the textiles, paper and pulp index dropped to minus 22 from zero.

Non-manufacturing sentiment slipped to plus 29 in May from plus 31 in April, weighed down by a 10-point decline in real estate and construction and a 6-point drop in general services, though retailers grew more optimistic while wholesalers soured.

Looking ahead, manufacturers expect sentiment to weaken further to plus 5 by August, reflecting growing uncertainty over the Iran war's trajectory and supply chain fallout, while non-manufacturers also forecast a decline to plus 18.

The poll, conducted from May 1 to 15, surveyed 492 major non-financial firms with 220 anonymous responses, with indexes calculated by subtracting the percentage of pessimistic respondents from optimistic ones, where positive figures indicate net optimism.

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