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Tankan: corporate Japan cheers as yen falls

December 14, 2016

Optimism at Japanese companies is on the rise for the first time in 18 months after Donald Trump’s election as US president breathed new life into the country’s drive to escape deflation.

The Bank of Japan’s closely watched tankan index for large manufacturers rose from +6 to +10 in December, the first increase since the second quarter of 2015, while the index for all companies rose from +5 to +7.

The rise suggests Japan’s economy is entering a new phase, driven by renewed yen weakness, after Mr Trump’s election brought a slide in the currency from ¥103 to ¥115 against the dollar.

Prime Minister Shinzo Abe and the Bank of Japan will cheer manufacturers’ better mood. It offers hope of a return to the early days of Abenomics in 2013, when yen weakness triggered higher prices and an optimistic mood across the country.

But the tankan also suggested the change of mood would be slow to translate into concrete investment, with companies trimming their outlook for the next quarter and adopting conservative assumptions about the future exchange rate.

Masamichi Adachi, senior economist at JPMorgan in Tokyo, said the tankan was “somewhat disappointing compared with our upbeat expectations”. He said sentiment would probably improve if the dollar stayed low but “it is probably too early for firms to be optimistic”.

The tankan is a quarterly survey, similar to ISM polls of purchasing managers in the US, that samples more than 10,000 companies with a response rate of almost 100 per cent. The percentage of respondents reporting bad business conditions is subtracted from those reporting good to give indices ranging from -100 to +100.

The notorious unreliability of Japan’s statistics on consumption and output — all prone to large revisions — means the BoJ relies heavily on the tankan to track the business cycle.

Sentiment improved most at energy companies, rising from +5 to +22, reflecting a recovery in the price of oil. But there were gains across a range of export sectors. General machinery was up eight points to +14, electrical machinery rose nine points to +4 and motor vehicles were two points higher at +10.

Conditions stayed strong in the services sector with construction at +40, communications at +44 and business services at +33.

Investment plans for the current fiscal year showed little change — companies tweaked them up slightly to growth of 1.8 per cent for the year — compared with growth of 5 per cent last year. Stronger investment will probably be needed to drive overall growth and inflation higher for Japan’s economy.

However, the figures do suggest Japan’s 18-month period of stagnation, which followed a 2014 consumption tax rise and a 2015 slowdown in emerging markets, is coming to an end.

That stagnation and a higher yen has dragged inflation down to zero, prompting the Bank of Japan to change its policy framework in September, capping 10-year government bond yields at zero while promising to overshoot its inflation objective of 2 per cent.

With Mr Trump’s election leading to higher US yields, that policy has proved highly effective, widening the gap between returns on Japanese and US bonds. That in turn has driven the sharp depreciation of the yen.

Via FT