Bank of Japan Tankan index hits three-year low

The Bank of Japan’s quarterly sentiment index has weakened again recently, falling by 5 points for large and export-orientated industrial companies in the second quarter, and reaching a three-year low of only +7 points. This important index, with readings ranging from -100 to +100, is now close to showing a balance between optimistic and pessimistic responses from the companies surveyed. Conversely, assessments from large companies in the services sector which are geared more to the domestic market have improved slightly recently, up from 21 to 23 points. The Tankan has recently slipped down from 12 to 10 points for all companies (all sectors and size categories).

Sentiment at large Japanese manufacturing companies consequently showed an above-average deterioration in the second quarter. Concerns about the current and future business climate are also understandable given the uncertainty and the real impact of the US/China trade dispute. Some good news did nevertheless emerge from the recent G20 summit in Osaka with the USA’s announcement that it would not now ramp up customs tariffs on Chinese exports to the US for the time being; the move would also have impacted Japanese companies which are important suppliers of intermediate goods. However, it remains to be seen whether planned further negotiations between Washington and Beijing will in fact have a positive outcome any time soon. The G20 summit has thus done virtually nothing to change conditions for the Japanese economy. Potential future exports to China and the USA remain subject to major uncertainty, which is weighing on investment activity and Japanese economic growth.

Looking ahead to the planned hike in sales tax set to come into force on 1 October, the Tankan has undoubtedly emitted a clear warning signal for the economy. A poor Tankan index in June had already been regarded by many observers as the last opportunity for Prime Minister Abe to defer the whole sales tax project again or cancel it completely for sound economic reasons to prevent triggering a recession under currently very crisis-ridden and fragile conditions. The Tankan has declined even more steeply than had generally been expected. Abe could therefore use the fall in this important economic barometer to argue that tax rises would be ill-timed at the moment for economic reasons. However, he will have to decide quickly to avoid being considered fickle.

Abe is essentially paying the price for having failed to implement important structural reforms as part of his economic policy – for example in the labour market, in the agricultural sector, and on the workforce participation rate for women. If these reforms had been pursued more resolutely and implemented within the “Abenomics” economic policy package since 2013, the economy would be much more stable and more effectively protected against fluctuating sentiment and growth. However, Abe now has little option in the short term other than to once again deploy expansionary fiscal policy and higher public debt – and cancel the sales tax hike – to stabilise the Japanese economy.

Rate this article


Thank you for your rating. Your vote:
There is no rating yet. Be the first! Current average rating: 0

Leave an answer

Your e-mail address will not be published. Required fields are marked *