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Quarterly Tankan survey shows challenges ahead for Japan

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econ_graphs - TANKAN_dec2014

Today was an important day for Japanese markets as not only was the quarterly Bank of Japan Tankan survey of business sentiment announced, but the market got a chance to react to the results of the previous day’s Japanese elections.

The Tankan survey slightly missed expectations on the Big Manufacturers Diffusion index, as it came in at +12 against expectations of staying the same as the third quarter at +13.  More worrying was the drop in the Big Manufacturers Outlook, as it fell to +9 against expectations it would climb to +14.  This was despite the significant drop in the Japanese yen, which is supposed to help big manufacturers and exporters in general.  Small manufacturing firms managed to beat expectations on current conditions (+1 actual versus -3 expected), but reported a disappointing outlook (-5 actual).

Non-manufacturers – particularly big ones – managed to beat expectations both on current conditions as well as the outlook, which was an encouraging piece of news.  Capital expenditure plans for next year beat estimates for big firms, which plan to increase capex by 8.9%.  Small firms on the other hand are planning to reduce their capex by 6.7%, a marginally smaller decrease than the 6.9% expected by economists.

As the chart shows, there was improvement in business sentiment during 2013, but 2014 has not been as kind – perhaps as a result of the April tax hike – and Japanese business has struggled.  The government hopes that a revival of business activity and profits will lead to higher wages and then a self-sustaining economic recovery.  The evidence for this process taking hold is lacking.

Overall the survey showed that the Japanese economy is still struggling and no clear path towards significantly positive economic growth is evident.  Policymakers will feel vindicated for their recent decisions – both the Bank of Japan for increasing its monetary stimulus and the government for delaying next October’s planned sales tax hike.

On the announcement of the Tankan survey results, there was little movement in the yen as dollar / yen traded from 119.05 before the news to 119.  The yen was responding more to a big selloff on Wall Street the previous week and a falling oil price, rather than the re-election of Shinzo Abe, which was probably well anticipated by the market.

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