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Japanese manufacturing confidence fell to its lowest level in over three years in April, driven by energy shocks and supply chain disruptions linked to the Iran conflict. The Reuters Tankan survey revealed a sharp 11-point drop to +7, the largest decline since early 2023, with the chemicals sector turning negative due to soaring input costs. Non-manufacturing sectors, however, showed resilience amid strong domestic demand. The outlook remains fragile, with further deterioration expected by July if geopolitical tensions persist.
This development highlights Japan's vulnerability to external energy shocks, given its reliance on Middle Eastern oil (95% of imports). Rising oil prices and disrupted supply chains via the Strait of Hormuz are pressuring manufacturers, particularly in materials industries. The divergence between struggling manufacturing and resilient non-manufacturing sectors underscores structural challenges in Japan's economy.
For markets, the data signals heightened downside risks to industrial output and growth. Traders should monitor the July Tankan update and oil price movements, as prolonged conflict in the Middle East could delay investment decisions and weigh on global supply chains. The Bank of Japan's policy response to inflationary pressures and energy costs will also be critical.
