Economy in Brief

The outlook survey Japan's Ministry of Finance business outlook survey for business conditions among large enterprises registered a decline in the second quarter, posting a -1.9 reading in the current quarter compared to 2.0 in the first quarter and 5.7 in the fourth quarter of 2024. Manufacturing enterprises registered even weaker results with a -4.8 reading in the second quarter, down from -2.4 in the first quarter and compared to +6.3 in the fourth quarter. Even nonmanufacturers in the second quarter logged a negative response at -0.5, compared to +4.1 in the first quarter and +5.4 in the fourth quarter of 2024. These are all responses from large enterprises.

The survey also covers medium and small enterprises; both medium and small enterprises showed negative figures for the second-quarter business conditions. For medium enterprises, the drop was to -0.9 from +0.7 in the first quarter and +3.8 in the fourth quarter. Whereas medium-sized enterprises showed less change with a -12.3 response for the second quarter compared to -12.7 in the first quarter and -4.7 in the fourth quarter. Small enterprises seem to be facing difficulty.

General conditions for the domestic economy in the survey for large enterprises showed a fall off to -6.2 in the second quarter from +3.1 in the first quarter and +4.2 in the fourth quarter. Drop offs were apparent for manufacturing and for nonmanufacturing establishments. Medium-term enterprises showed a similar and sharper drop off and small enterprises saw weakening worsening with the overall negative numbers being posted for the second quarter even weaker than what they registered under business conditions.

On the employment side, large enterprises posted a 26.9 reading in the second quarter, a decrease from the first quarter reading of 28.3, compared to a fourth quarter reading of 27.4. Manufacturers showed flat employment responses; nonmanufacturing enterprises showed weakening responses. Medium and small enterprises both show a pattern of weakening.

The Outlook In addition to the current quarter responses, there are also one- and two-quarter-ahead outlooks provided by the survey. Business conditions for large companies post a +1.5 reading for the quarter ahead and +2.6 for the quarter after that. For medium-sized enterprises, they see a +3.1 reading for the quarter ahead and +3.3 for the quarter after that. Small enterprises log a -5.1 reading for the quarter ahead and -3.8 for the quarter after that.

The readings for the general domestic economy are generally higher than for business conditions for large enterprises. In all cases, the net readings for the general domestic economy for the quarters ahead are better than the assessment for the current quarter (2025-Q2).

One significant caveat here is that the outlook quarter for employment generally shows weaker net readings for the future quarters than for the current quarter -and this is true across the board.

Rankings To understand these assessments better we can look at them as rankings, ranked against their own past responses. The rank standings of the various data across the industry types and various sizes of companies for business conditions shows generally stronger rankings for medium and smaller enterprises than for large ones for the current quarter. Large and medium-sized firms see erosion in conditions looking ahead and farther ahead. But small nonmanufacturing enterprises see conditions firming ahead compared to past responses on this survey.

General domestic economic assessments show weak rankings across the board all below their 50-percentile mark in standing, but all also show improving trends in ranking looking ahead. But the response for small manufacturers even though they obey these same trends, they are extremely weak.

The job market assessments show a rank assessment of 80- and 90- percentile standings across most firms regardless of firm size; the exception is for medium and small manufacturers. But even there while their current quarter standings are below 80%, their outlook remains solid even with a current quarter ranking as low as 41%, small manufacturers get their two quarter ahead employment expectations up into the 80th percentile.

Japan’s PPI in April edged higher, rising by 0.1% month-to-month. For all manufacturing, the PPI stepped back and declined by 0.4% month-to-month. Both of these follow stronger increases in the previous months.

Still, these headline PPI shows a gain of 4.1% over 12 months, an expansion pace of 3.9% annualized over six months and a gain over three months at an annual rate of 3.6%, a steady, but moderate, deceleration for inflation.

Manufacturing prices rose by 2.3% over 12 months and accelerated slightly to an annualized pace of 2.6% over six months before slipping into low gear and rising at just a 1.6% annual rate over three months.

Japan’s CPI also decelerates on this sequential timeline, but with a hump in the middle after accelerating over six months. The U.S. PPI has that same profile. Japan’s core exhibits barebones deceleration; after rising at a 1.6% annual rate over 12 months, it settled into a gain of 1.5% annualized over both three months and six months. Producer prices in the EMU show ongoing declines with a lesser decline over six months, then, a greater pace of decline over three months, at -5.5%.

These comparisons reveal a rather broad-based trend for inflation to ease and weaken, especially over the recent three months.

A big part of inflation going weak over three months is oil prices. Oil prices (Brent) fell by 17.9% in April. They also fell at a 54.4% annual rate over three months, a 25.2% pace over six months, and at 28.2% over 12 months. Falling energy prices, especially if they fall long enough and sharply enough, get into the pricing system and have an impact beyond headline prices. We are seeing that on global basis, right now.

U.S. and EMU PPIs as well as Japan’s PPI and manufacturing prices all show positive correlations ranging from 0.37 to 0.53 with Brent prices with both series expressed as year-on-year percentage changes. Japanese CPI prices, however, show negative correlations between energy prices and headline core inflation rates, -0.15 to -0.37.

One month in the second quarter data show U.S. and PPIs revealing declines in prices along with Japan’s manufacturing price index. In this nascent quarter, Brent prices are edging lower at a 0.2% annualized rate. Still, Japan’s CPI is rising at a 1.4% annual rate and the core at a 1.7% annual rate as Japan’s CPI continues to resist the siren call of lower prices from the Brent index.