Japan: Tankan survey – situation improved but expectations slightly gloomier

The quarterly „Tankan“ survey of the Bank of Japan for the final quarter of the year has revealed an improvement in the sentiment readings for Japanese industrial companies. The diffusion index (from -100 to +100) recorded 10 points for the large corporates of the manufacturing sector after three consecutive quarters of in each case 6 points, and thus exceeded market expectations. The slight majority of companies which see an improvement in their business conditions has therefore risen noticeably of late. Optimism in industry has gained uplift from the slight depreciation of the yen against the US dollar in the weeks following the US presidential election, the evidently somewhat brisker export demand and the prospect of fresh orders from the government that has now started its fiscal stimulus package announced in August. In the case of the large corporates of the more domestically-aligned service sector, by contrast, the Tankan index remained constant at 18 points.

The familiar pattern of the larger-sized enterprises posting higher readings for their estimates of business conditions than the smaller-sized enterprises has also been confirmed again this time. For all the surveyed companies, i.e. across all sectors of the economy and all size classes, the Tankan index climbed from 5 to 7 points and has therefore returned to the level reached at the beginning of the year. In the case of the large corporates, the index climbed from 12 to 14 points. Yet the current business confidence in the industrial sector is somewhat worse than in the service sector, while the more locally-aligned small enterprises tend to record lower sentiment readings than the medium and large corporates. The large corporates, in particular, are thus still planning additional investment expenditure for the current fiscal year that does not end until 31 March 2017.

The result of the latest Tankan survey spells good news for the Japanese economy. However, the fact that the results are evidently substantially driven by temporary special effects, such as the government’s fiscal stimulus package, or by the somewhat more favourable influences recently deriving again from export demand, makes them somewhat questionnable. Above all the momentum of demand from China, Japan’s second most important export market, could soon ease up again somewhat. None of this can be construed to mean that the Japanese economy is about to experience a sustainable and consistently stable upswing. All in all, therefore, a degree of scepticism remains with regard to Japan’s longer-term economic development. Incidentally, this scepticism also finds expression in the Tankan survey, as revealed in the question of how companies expect the sentiment index to look in three months‘ time, which most companies in Japan answered by ticking the box “Somewhat worse than today“.

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