Japan Economy: A Better Tankan survey report gives Government cause for optimism
Published 3 October 2014
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Summary
Japan’s Tankan quarterly manufacturing business sentiment survey beats expectations by improving slightly in the last quarter. The results should provide relief to Japanese policy makers, stiffening their resolve to press ahead with the next VAT rise.
Detail
Manufacturing business sentiment turns out to be better than expected
The Bank of Japan’s (BOJ) influential, quarterly business sentiment survey Tankan, showed that large manufacturers’ current sentiment Diffusion Index (DI) was 13. This is a slight improvement from 12 in the previous survey and beats market expectations which had expected a moderate deterioration to 10 given lower than expected consumption figures since April’s VAT increase.
However, large non-manufacturing companies viewed current conditions less optimistically than expected. Their current sentiment DI of 13 is 6 points lower than 3 months ago and 4 points below consensus. The manufacturers’ sentiment survey is regarded as the more important as it includes exporters, which are considered as a key driver for economic growth. However, any positive DI figure means that more firms are more positive than negative.
Sentiment outlook is expected to be almost flat
With an unchanged sentiment DI of 13, the survey indicated that manufacturers do not expect business conditions to improve in next three months. The forecast for non-manufacturers DI was 14, showing a slight improvement.
FY2014 private capital investment plans upgraded
The survey also shows that large corporations now plan to invest 8.6% (was 7.4% in the previous survey) more in FY2014 than FY2013. Of this, large manufacturers expect to increase their annual investment for FY2014 by 13.4% (was 12.7%) and non-manufacturing firms from 4.9% to 6.3% compared to the previous year.
Manufacturers expect a weak Yen but stronger than at present
Large manufacturers are currently assuming an average FY2014 Yen/USD exchange rate of 100.73 Yen (was 100.18) as the basis for their forecasts. This is stronger the current rate of about 109 which means the profitability of exporters’ could be higher if current exchange rate levels are sustained. Japan’s Cabinet Office believes that the current exchange rate level has a net positive impact on the economy as a whole.
On 1 October , in the Tokyo markets, the exchange rate reached the Yen110/USD mark for the first time since August 2008. The expected widening gap between US and Japan economic fundamentals and diverging monetary policy may be encouraging investors to buy US dollars over Yen.
Labour shortage spills over to large manufacturers
The survey also revealed that for the first time in six years, large manufacturing firms are reporting labour shortages. Other parts of the economy including SME’s and non manufacturing firms have previously indicated the same.
Comment
The overall Tankan results show a steady recovery. The increased private sector plans for higher domestic investment will be particularly welcome and demonstrate Japanese firms continued confidence in the economy. However, increasing labour shortages could go to both ways: either becoming constraints on Japan’s economic expansion or supporting Japan’s further economic recovery by increasing labour wages and private consumption as the Bank of Japan predicts.
Disclaimer
The purpose of the FCO Country Update(s) for Business (”the Report”) prepared by UK Trade & Investment (UKTI) is to provide information and related comment to help recipients form their own judgments about making business decisions as to whether to invest or operate in a particular country. The Report’s contents were believed (at the time that the Report was prepared) to be reliable, but no representations or warranties, express or implied, are made or given by UKTI or its parent Departments (the Foreign and Commonwealth Office (FCO) and the Department for Business, Innovation and Skills (BIS)) as to the accuracy of the Report, its completeness or its suitability for any purpose. In particular, none of the Report’s contents should be construed as advice or solicitation to purchase or sell securities, commodities or any other form of financial instrument. No liability is accepted by UKTI, the FCO or BIS for any loss or damage (whether consequential or otherwise) which may arise out of or in connection with the Report.