Japan: Tankan Weaker but Not as Bad as Feared

Daily Forex Fundamentals | Written by Danske Bank | Jul 01 08 07:18 GMT |

The Q2 Tankan survey released by Bank of Japan (BoJ) weakened but not as much as expected and does in the details paint a more positive view of the Japanese economy than other recent business surveys like yesterdays Nomura/Reuters PMI. Overall however the Tankan survey is still consistent with over view that GDP growth will slow below potential (we estimate potential growth at 1.5% q/q AR) in Q2 and Q3 on the back of slower private consumption and slower growth in both export and business investment demand (see chart 1). While overnights Tankan survey has not materially changed our view of the Japanese economy it does give us some assurance that the economy is not in free fall: Overseas demand remain relative robust (see chart 9), Japanese companies still plan to increase capital spending in the current fiscal year (see chart 7), inventories are manageable and there are no signs of a major impact on credit conditions from the recent global credit crisis (see chart 8).

Looking into the details the Tankan diffusion index (current conditions) for large manufacturers in Q2 08 declined to 5 (Consensus: 3, DB: 1) from 11 in Q1 08 and the actual development in business conditions in Q2 has been slightly worse than expected in Q4 08 (see chart 2) For large manufacturers business conditions are expected to weaken slightly to 4 in Q3 (Consensus: 2, DB 0). Outside manufacturing business conditions in Q2 only deteriorated slightly to 10 (Consensus: 8, DB: 5) for large enterprises and is only expected to decline slightly to 8. Although enterprises report that the development in Q2 overall has been slightly worse than expected, the comparatively small back between the current conditions and outlook for Q3 does indicate some stabilization in business conditions (see chart 2 and chart 3).

For large enterprises planned capital expenditures (including land purchase) is expected to decline 2.4% for fiscal year (FY) 2008 relative to capex expenditures in FY 2007. It should be noted that these figures are budgeted capital expenditure and usually this figure is revised up through the year as new projects are added to the Capex (see chart 7). Still the planned increase in capex is weaker than last year and there certainly is downside risk to Investments.

With headline inflation possible jumping just outside the 0%-2% Bank of Japan price stability range there will probably be increased focus on price behavior and expectations. According to Tankan more Japanese enterprises are indeed planning to increase finished good prices (see chart 10). However, the main message continues to be, that Japanese enterprises are having difficulties passing higher input prices unto customers.

Danske Bank

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