Japan manufacturers stay upbeat on chip demand, services hit by costs

Japanese manufacturers' sentiment remained relatively upbeat in July, supported by solid semiconductor demand, while confidence among non-manufacturers fell as the Middle East conflict, a weak yen and rising interest rates pushed up costs, the latest Reuters Tankan survey showed.

The monthly poll, a leading indicator of the Bank of Japan's quarterly Tankan business survey, showed that the manufacturers' sentiment index was unchanged at plus-13 in July from June.

Manufacturers reported a recovery in the semiconductor market, including in memory-related demand, as well as rapidly expanding orders for products used in chip applications and AI servers. Orders for electronic components were also rising broadly.

"Order volumes and values are at levels we've never seen before, and we're concerned about production capacity," a manager at a precision machinery maker said.

The July survey, conducted from July 1 to July 10, received responses from 218 out of 511 firms polled. The indexes are calculated by subtracting the percentage of pessimistic responses from the percentage of optimistic ones, with positive figures indicating net optimism.

The non-manufacturers' sentiment index fell to plus-25 from plus-32, weighed down by cost pressures and uncertainty over the U.S.-Israeli war with Iran.

"Although signs of a resolution to the Middle East issue are beginning to emerge, the situation has not yet recovered," a manager in the service sector said.

The BOJ's Tankan survey released earlier this month showed the business mood hitting an eight-year high and corporate inflation expectations rising to record levels.

At the same time, the central bank signalled caution on inflation last week, saying the Iran war was likely to prompt more firms to raise prices later this year.

While the United States and Iran reached a tentative deal to end the war in June, the truce remained fragile, with both sides exchanging missile strikes. Japan's wholesale inflation spiked to a three-year high of 6.3% in May, a sign companies were already passing on higher costs from the energy shock.

Looking ahead, manufacturers expect sentiment to be stable, with the index forecast to edge up to plus-14 in October. The non-manufacturers' index is also expected to stay at plus-25 as business leaders assess the fallout from geopolitical risks and supply chain challenges.

(Reporting by Satoshi Sugiyama; Editing by Muralikumar Anantharaman)