Written By: Miles Pearson – Forex Focus
An insight into the Q2 2017 Tankan survey and the BOJ’s July monetary policy
Tankan is a quarterly corporate survey organized by the Bank of the Japan (BOJ) for businesses operating in the country. The short-term economic survey is conducted to gauge the business sentiment in the country and includes more than 10,000 Japanese companies: small, medium and large enterprises in addition to financial institutions. The survey, which until December 2003 categorized organizations based on the number of workforce employed, revised its policy from March 2004 to survey organizations based on pre-defined minimum capital.
The quarterly survey comprises manufacturing, non-manufacturing and financial sectors, with the assessment of the current quarter released in the forthcoming month, prior to corporate earnings; and the outcome of the survey is more or less an accurate indicator of the expected corporate earnings for the quarter, as the survey covers a wide range of settings, such as:
- Business conditions,
- Demand and supply conditions,
- Input and output prices,
- Sales and current profits,
- Fixed investment,
- Financial position.
Illustration of the Tankan survey for large manufacturers and non-manufacturers from Q1 2016-Q2 2017:
The Tankan survey for second-quarter 2017 was announced on July 3, with business conditions in large enterprises representing the manufacturing sector rising to 17 from 12 in the previous quarter. The index was at its highest since March 2014 and came in better than the forecasted number of 15. The sentiment in the non-manufacturing index, too, jumped from 20 in first-quarter 2017 to 23 in the quarter ending June 2017, bettering the forecasted 18.
The diffusion index measuring domestic and international demand and supply for goods and services in the large manufacturing and non-manufacturing industries continued to decline but at a slower pace, compared to the previous quarter. Input prices continued to rise at a slower pace for large manufacturers, while output prices failed to keep up with rising input costs, thereby reducing net profits. However, in the non-manufacturing sector, the output cost index rose in the second quarter, while input prices dropped slightly quarter-over-quarter.
Following the Tankan survey, the Bank of Japan (BOJ) in its policy meeting ending July 20, 2017, left key rates unchanged while continuing with its monetary-stimulus package. The central bank in its policy statement believed that:
The Japanese economy is expanding due to the accommodative stance taken in the form of stimulus, and the economy will continue to grow through fiscal year 2018 before slackening in 2019 as business income slows.
The consumer price index, which has remained subdued in the 0-0.5 percent range year-on-year, is expected to rise in the medium- to long-term as firms adjust wages and increase output costs, especially in the manufacturing sector.
Private consumption has improved due to a rise in employment levels, with the unemployment rate holding steady at 3 percent.
A tightening labour market is leading to a moderate rise in employee income.
Uncertainty in global economies, especially regarding the economic policies of the United States, the terms of the United Kingdom’s exit from the European Union and geopolitical risks, could weigh on economic activity in Japan.
Real gross domestic product (GDP) is expected to slow from 1.5-1.8 in 2017 to 1.1-1.5 in 2018, with the growth rate expected to decelerate to 0.7-0.8 in 2019 as the hike in the consumption tax takes effect.
Corporate profits are likely to grow as a result of the stimulus measures and as global economies expand.
Fixed investments by businesses should continue to expand due to fiscal measures that include tax deductions for capital investment, rising corporate profits and low interest rates.
Durable goods orders should continue to outperform the non-durable goods sector.
The central bank also stated that quantitative and qualitative easing (QQE) is likely to continue through fiscal year 2018, with interest rates—both in the short- and long-term—likely to remain in negative territory as the bank looks to achieve a price stability target of 2 percent.
The monetary base has registered 20 percent growth, with the outstanding at the end of June 2017 pegged at 468 trillion yen, which is more than 85 percent of the country’s real GDP. The yield on 10-year Japanese government bonds (JGBs) is close to 0 percent, while the yield on 20–year bonds is around 0.5 to 1 percent. Financial institutions have been highly accommodative while lending to firms, thereby leading to robust financials indicated in the diffusion index of the Tankan survey. Key short-term interest rates in Japan are currently at -0.1 percent, with the annual pace of JGB buying close to 80 trillion yen. In addition, the central bank in its July meeting voted by a majority to purchase ETFs (exchange-traded funds) and REITS (real-estate investment trusts), thereby increasing the asset purchase in these instruments to 6 trillion and 90 billion yen per year respectively.
Since the conclusion of the BOJ monetary policy meeting in July, the Japanese yen has risen more than 2-1/2 percent versus the greenback and was up about a percent versus the euro as of August 22, 2017.