What it means
The name is a short form of a Japanese phrase meaning short-term economic survey of enterprises. The central bank sends questionnaires to a large sample of companies, covering big manufacturers, smaller firms and non-manufacturers, and publishes the findings every quarter.
Because managers are close to orders, prices and hiring, their answers often signal change before official statistics do. The best-known result is the diffusion index.
Firms are asked whether business conditions are favourable, not so favourable or unfavourable. The index is the percentage of firms answering favourable minus the percentage answering unfavourable, so a positive number means optimists outnumber pessimists, a negative number means the reverse, and the size of the number shows how lopsided the mood is.
The survey also asks about prices, sales, profits, hiring, exchange-rate assumptions and plans for capital spending. These answers help the central bank judge inflation pressure and investment trends.
They are also used by analysts who build forecasts of growth. The headline figure usually quoted is the index for large manufacturers, since they are heavily exposed to exports and global demand.
A rise in that number often moves the yen and Japanese share prices, because it suggests stronger corporate earnings. Analysts also read the figures for non-manufacturers, which reflect domestic demand more closely.
The survey is a measure of sentiment, so it should not be read as a precise count of output or profit. Managers can be too gloomy or too cheerful, and answers may lag sudden shocks.
The index is therefore used alongside hard data such as industrial production, retail sales and employment. Companies outside Japan use the survey too.
A foreign supplier or investor with exposure to Japanese customers can treat a falling index as a prompt to review credit limits and sales targets. A rising index may justify building extra stock or hiring sales staff.
In practice
Real-world examples.
Example
A currency trader at an investment bank sees the Tankan index for large manufacturers come in 5 points above forecasts. She expects the Japanese yen to strengthen and adjusts her positions before the market opens. The move reflects a belief that corporate earnings will rise.
Example
An exporter of machine parts to Japan reads the survey and notices that firms plan to raise capital spending. The finance director raises the sales forecast for the next two quarters by 8%. She also negotiates extra production capacity with her suppliers.
Example
A fund manager reviewing Japanese shares finds that the index for small non-manufacturers has fallen for three quarters in a row. She reduces her holdings in domestic retailers. The decision is supported by weak retail sales figures published the same month.
Formula
Calculation
Diffusion index = percentage of firms answering favourable - percentage of firms answering unfavourable
Suppose a survey of large manufacturers finds that 40% describe conditions as favourable, 45% describe them as not so favourable and 15% describe them as unfavourable. The index = 40 - 15 = +25. In the previous quarter, 35% were favourable and 20% were unfavourable, giving an index of 35 - 20 = +15. The index has risen by 10 points, which shows a clear improvement in sentiment.Case study
Seen in the real world.
Kawasemi Instruments is an illustrative, fictional Japanese manufacturer of factory sensors with annual sales of $400,000,000. Its finance team uses the central bank survey as one input when setting production plans for the coming quarter.
When the index for large manufacturers fell from +20 to +8 within two quarters, the team treated it as an early warning. It cut planned purchases of components by 10%, worth $12,000,000, and delayed the opening of a new line.
Orders did weaken the following quarter, and the lower stock levels saved the company from heavy write-downs. The illustrative lesson was that the survey did not predict the size of the slowdown, but it gave the company enough warning to act before its own order book showed the problem.
Watch out
Common mistakes.
- Reading the index as the percentage of firms that are optimistic, when it is the difference between optimists and pessimists.
- Treating the survey as hard data on output or profits, when it records opinions that can change quickly.
- Looking only at the headline for large manufacturers and ignoring smaller firms and non-manufacturers, who tell a different story about domestic demand.
Questions
People also ask.
Who publishes the Tankan?
It is published by the Bank of Japan, Japan's central bank, once every quarter, with results for different company sizes and industries.
What does a positive index mean?
It means more firms report favourable conditions than unfavourable ones, though it says nothing about the level of profits.
Why do markets care about it?
The survey gives an early view of corporate sentiment and investment plans, which can influence expectations for growth, interest rates and the yen.
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