Japan Tankan Corporate Sentiment Gauge Misses Expectations

Tankan Large Manufacturer Index Holds at 6

Japan’s large manufacturers don’t see business conditions getting any better, and they don’t see them getting any worse. At least for now.

Still, they remained more downbeat over the past quarter than expected, and the least optimistic in more than three years, underscoring the effects of a stronger currency and weak global growth. This will likely make it more challenging for the Bank of Japan to stoke inflation and revitalize the economy.

Key Points

  • The Tankan index, which measures large manufacturers’ sentiment toward broad conditions, was unchanged at 6 in September from June, the lowest level since the early days of Abenomics more than three years ago, according to the Bank of Japan’s quarterly survey. (economists’ estimate +7)
  • A reading above zero means optimists outnumber pessimists.
  • The index is forecast to remain at 6 in December. (economists’ estimate +8)
  • Large companies from all industries plan to increase capital spending slightly to 6.3 percent in the year through March 2017, compared with a 6.2 percent rise projected in the previous survey. (economists’ estimate +6.5%)

Big Picture

Strength in the yen, which has gained about 19% this year, has cut into corporate profits and pushed down import prices, making it more difficult for the BOJ to generate inflation. Prime Minister Shinzo Abe’s growth program focused on a weaker currency fueling higher corporate profits, with the hope that companies would share the gains via higher wages. Profits hit record levels when the yen weakened sharply, but wages barely moved.

Policy makers are struggling to fully overcome deflation and attain sustainable growth, with the economy swinging between modest expansions and contractions. The flat reading of the Tankan index came after government reports last week showed consumer prices dropped for a sixth straight month and households cut spending more than forecast.

Economist Takeaways

  • "I think it shows some resilience among business sectors in Japan. Of course, the yen is almost 20 percent higher over the year, it’s weighing on the profitability of the corporate sector and the inflation rate," Masayuki Kichikawa, chief macro strategist at Mitsui Sumitomo Asset Management Co. in Tokyo, said on Bloomberg TV.
  • Large companies’ forecast for the yen is "still distant from the actual level," flagging a risk to the downside for business confidence in coming months, said Kyohei Morita, chief Japan economist at Barclays Plc in Tokyo.
  • “Japan’s economy isn’t falling apart but it’s not gaining traction. The economy will likely stay at a standstill,” Yoshiki Shinke, an economist at Dai-ichi Life Research Institute in Tokyo, said before the reports were released.

The Details

  • The Tankan index of large non-manufacturers fell to 18 in September from 19 in June. (estimate +18)
  • The index is forecast to fall to 16 in December. (economists’ estimate +18)
  • Large manufacturers forecast that the yen will trade at an average of 107.92 versus the U.S. dollar in the year through March 2017, compared with 111.41 in the previous survey.
  • The Tankan survey was conducted from Aug. 29 to Sept. 30.
Before it's here, it's on the Bloomberg Terminal.
LEARN MORE