Japan: Economic sentiment remains subdued – expansionary monetary policy evaporating

In Japan, the economic sentiment remains restrained. The key Tankan Index edged up slightly at the end of the first quarter, but the result was slightly below market expectations. Among the major industrial corporations, all strong exporters, the index figure rose from 10 to only 12 points – despite the yen having been devalued and good export figures in the first quarter. One factor here may have been the politically induced uncertain future sales prospects in important Japanese export markets such as the USA and China. The Tankan Index is calculated by the Bank of Japan and summarises the sentiment figures for over 10,000 commercial corporations.

In terms of all the companies surveyed, meaning all sectors and all different sizes of company, the index rose from 7 to lodge at 10 points. Measured in terms of the possible spread of this diffusion index, which ranges from -100 to +100, the figure is thus only just above the “neutral” line of zero. What comes to bear here is that above all the smaller companies that focus on the domestic market are feeling fierce competition and hardly see any way of passing on higher energy prices, for example. Since numerically these companies comprise the majority of the spectrum surveyed, the sentiment for the index as a whole is accordingly dampened by them. By contrast, sentiment was best among the large corporates in the Japanese service sector, where the index climbed from a previous figure of 18 to rest at 20.

The latest Tankan report confirms the tendency in Japan, in evidence for some time now, that larger corporations tend as a rule to be more optimistic than the small ones and that the larger service-sector firms that do not have direct foreign rivals post the best sentiment figures.

For the Bank of Japan, for all the slight improvement on the prior quarter, the latest results are still not a sign that its extremely expansionary monetary policy is now posting successes on a broader footing. Sentiment varies too greatly from one sector to the next and there remains too much scepticism as regards an improvement in economic conditions. This is not a good environment for an imminent recovery of private investment activity in Japan, nor for it to move comprehensively and steadily northwards. One indication of the widespread doubt in economic developments going forwards this year is the fact that most recently, for the totality of companies business expectations in the three-month horizon have not improved, but have instead remained constant – at the very low index level of a mere +2. A comparatively large number of companies thus expect that, measured in terms of how they assess the current situation, their business activities may see short-term and potentially significant setbacks. Against this backdrop, at present we also see no reason to adjust our economic forecast for Japan upwards. We uphold our essentially cautious forecast of growth of just short of 1 percent this year.


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