On July 1, the Bank of Japan (BOJ) released the results of its June Tankan, the Short-Term Economic Survey of Enterprises in Japan. The Diffusion Index (DI) for business conditions among large enterprises (manufacturing) improved for the fifth consecutive quarter to plus 22, the highest level since the March 2018 survey eight years ago. The DI is calculated by subtracting the percentage of companies reporting unfavorable business conditions from the percentage of companies reporting favorable conditions. It is widely used as a key indicator of Japan's economic conditions and is compiled from the BOJ's quarterly Tankan survey.

The strong performance of large manufacturers was driven by robust demand related to AI and semiconductors, as well as front-loaded demand prompted by uncertainty over the situation in the Middle East. The successful pass-through of rising raw material costs also supported business conditions. However, benefits from the improved business environment have not spread to smaller companies. While the DI for large enterprises stood at plus 22, it was plus 17 for mid-sized enterprises and only plus 9 for small enterprises. The same disparity is evident in the outlook: large enterprises expect a DI of plus 17, compared with plus 9 for mid-sized enterprises and only plus 2 for small enterprises, indicating a clear hierarchy in business sentiment by company size. 

On June 25, the National Federation of Small Business Associations published its Monthly Business Conditions Survey for May. The DI for the manufacturing sector stood at minus 37.4. The report concluded that “business sentiment remains at a low level.” It also noted in its analysis that “government efforts to ease current business constraints have attracted high expectations, but companies still face soaring petroleum-related product prices. At the same time, passing on higher costs to prices takes time.” Comments received by the National Federation reveal the seriousness of the situation: “Everything needed for production is becoming more expensive”; “Shipping adjustments and order restrictions have been imposed on some materials”; “Requests for price revisions are coming from every quarter, making it difficult to keep up with explaining the situation to customers”; and “Even though customers will eventually accept price increases, we are concerned about the resulting decline in orders.”

The price pass-through rate for SMEs has shown improvement, but they are still able to pass on only 54.2% of increases in input costs*. In other words, large companies have been successful in passing on rising costs—a key factor behind their favorable business conditions—while many SMEs are left to absorb much of the remaining cost burden themselves. Violations of the Subcontract Act have stayed at a high level. The number of violations of prohibited conducts reached 716 in fiscal 2025, up 46% from the previous year. Of these, 547 cases (up 28%) involved payment-related violations, including delayed payments, unjustified reductions in payment, and unfairly low pricing. In January 2026, the Subcontract Act was amended to strengthen its regulations and was renamed the Act on Ensuring Proper Transactions Involving Specified Entrusted Business Operators. Ensuring fair subcontracting practices such as those involving manufacturing contracts is essential for distributing the financial resources needed for wage increases throughout the supply chain. If Japan as a whole is to share in the benefits of the current economic upturn, fair and equitable business practices must be established across every stage of the supply chain.

*“Follow-up Survey on the Price Negotiation Promotion Month (March 2026),” released by the Small and Medium Enterprise Agency

Takashi Mizukoshi, the President
This Week’s Focus, June 28 – July 2, 2026