Assessing the Resilience of Japan's Non-Manufacturing Sector Amid Economic Rebalancing

Japan's non-manufacturing sector has demonstrated remarkable stability in the post-pandemic era, offering investors a compelling case for strategic positioning. The latest Reuters Tankan survey for October 2025 underscores this resilience, with the non-manufacturers' index remaining unchanged at +27, a level that reflects sustained optimism despite broader economic headwinds. This stability is particularly notable given the sector's exposure to rising input costs and global trade uncertainties, such as U.S. policy shifts affecting export-driven industries. For investors, this signals a sector capable of weathering macroeconomic volatility, making it a cornerstone of a diversified portfolio in Asia's third-largest economy.

Retail and Services: A Gradual but Steady Recovery

The retail segment, a critical component of Japan's non-manufacturing sector, has shown signs of renewed vigor. The Reuters Tankan data reveals that the retail index climbed to +27 in October 2025, up from +20 the previous month, driven by recovering urban sales and a surge in inbound tourism. This trend aligns with broader demographic and policy shifts: Japan's government has actively promoted tourism through visa liberalization and cultural campaigns, while urban centers like Tokyo and Osaka are seeing pent-up demand for discretionary spending.

Services, including hospitality and professional services, are also benefiting from this tailwind. According to JETRO, non-manufacturing inward foreign direct investment (FDI) rebounded in October 2022, with a 14.0% increase in core machinery orders, driven by construction and information services. An ING analysis further outlines these dynamics and their implications for near-term recovery. While FDI in the sector dipped by 50.4% in 2023, particularly in transportation and finance, the long-term outlook remains positive as Japan's focus on digital infrastructure and green energy gains momentum.

Regional Infrastructure: A Catalyst for Resilience

Post-pandemic economic rebalancing has prioritized infrastructure as a lever for long-term growth. Japan's government has allocated over ¥30 trillion over five years for capital deepening, workforce renewal, and green programs, with a specific emphasis on "quality infrastructure" that balances economic efficiency, transparency, and sustainability. These investments are not merely about repairing existing systems but reimagining them to support non-manufacturing sectors.

For instance, the Ministry of Economy, Trade and Industry (METI) has spearheaded initiatives to enhance regional connectivity, including the development of hydrogen hubs and automated logistics corridors as part of its post-pandemic economic stimulus. These projects are designed to reduce Japan's reliance on traditional manufacturing and foster innovation in services and technology. Additionally, the Regional Innovation Spread Act has enabled local governments to co-fund sector-specific clusters, such as Nagoya's AI-driven mobility hubs and Fukuoka's biotech ecosystems. While specific regional allocation figures remain opaque, the strategic focus on decentralizing economic activity suggests untapped potential in secondary cities and rural areas.

Strategic Investment Opportunities

For investors, the non-manufacturing sector's resilience and policy tailwinds present three key opportunities:
1. Retail and Tourism-Linked Assets: With inbound tourism rebounding and urban consumption patterns shifting toward experiential spending, real estate and tech-enabled retail platforms in major cities are prime targets.
2. Digital and Green Infrastructure: Japan's push for AI supercomputers, data centers, and renewable energy projects offers exposure to high-growth, government-backed sectors. For example, SoftBank's ¥700,000-square-meter data center expansions in Hokkaido and Osaka are emblematic of this trend.
3. Regional Innovation Hubs: Smaller cities like Kobe and Fukuoka are becoming innovation epicenters, supported by METI's funding for life sciences and quantum computing. These regions offer lower entry costs and higher growth potential compared to Tokyo-centric markets.

Conclusion

Japan's non-manufacturing sector is a testament to the power of strategic policy and structural adaptability. While challenges like demographic decline and global trade tensions persist, the sector's stability-evidenced by the Tankan's +27 reading-and targeted infrastructure investments position it as a key driver of economic rebalancing. For investors, the path forward lies in aligning with Japan's long-term vision: a diversified, innovation-led economy where retail, services, and regional infrastructure converge to create sustainable value.