Japan Business Sentiment Drops Sharply on US Tariff Impact

Business sentiment among large Japanese companies declined sharply in the second quarter of 2025, with the Business Survey Index (BSI) falling into negative territory for the first time in five quarters. The BSI for large manufacturers dropped to -4.8 from -2.4, while large non-manufacturers also saw a decline, reflecting concerns over worsening business conditions. This downturn is largely attributed to uncertainty and challenges stemming from sweeping tariff policies imposed by U.S. President Donald Trump, particularly impacting export-reliant sectors like automakers and auto parts manufacturers, which expect a significant profit plunge. The overall profit forecast for fiscal year 2025 is a 2.1% decline, with manufacturers projecting a recurring profit shrinkage of 1.2% by March 2026. Despite the current slump, there is cautious optimism among manufacturers for a rebound later in the year, with expectations of growth in investment in software and plant and machinery. These developments highlight the growing unease in Japan’s economy due to escalating U.S. trade barriers and their impact on key industries.