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Japan’s business confidence weakens in Q1 – April Tankan survey

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On Sunday of last week, the Bank of Japan’s quarterly tankan manufacturing and non-manufacturing survey data was released. Covering the period of the first quarter, data showed that confidence among the larger manufacturing firms in Japan weakened for the first time in two years.

The decline in confidence came as investors remained cautious on the business outlook on a host of factors that included the appreciation in the exchange rate of the Japanese yen, the volatility in the equity markets and the U.S. led trade measures that cast a shadow of uncertainty among exporters.

The main tankan index measuring the sentiment among large manufacturers showed that the index was at +24 in the three months ending March. This was weaker compared to the previous quarter’s revised reading of +25.

BoJ Tankan Survey – Q1 2018. Source: Japan Macro Advisors
BoJ Tankan Survey – Q1 2018. Source: Japan Macro Advisors

This was also weaker than the expected forecasts of +25 by the economists polled. The tankan manufacturing index shows the percentage of companies that see favorable business conditions compared to those who view the business outlook as being unfavorable.

The April tankan survey results comes at a time when in the first quarter end, the Japanese yen had gained on average six percent against the U.S. dollar. At the same time, Japan’s equity markets were seen falling 5.8% while trade measures announced by President Trump included imposing tariffs on steel and aluminum prices that also included Japan’s exports among other allies of the United States.

The April tankan survey reflected that overall, Japan’s big manufacturing firms stayed optimistic about the business outlook but, were seen to be cautious.

A similar survey that tracked the big non-manufacturing firms was seen coming in at +23 in the three months ending March. This was the same reading compared to the previous quarter and was slightly below the forecasts of +24.

Profits are expected to slip 2.3% in the manufacturing sector according to the report for the year ending March 2019. This was based on the assumption that the U.S. dollar might be averaging around 109.6 yen during the business year. However, by some standards this was seen by the economists as being optimistic.

Analysts expect that the U.S. dollar will average around the 105.00 level to the yen for the period. Manufacturing firms said that they plan to increase capital investment by at least 2.3% during the current fiscal year. However, this could be revised higher in the coming quarters

The diffusion index was seen at 26 for December, following the BoJ making changes to the revision of the sample companies from the March data.

Japanese firms forecast lower profits

The survey also showed that the manufacturing firms were more likely to adjust their profit expectations further given the exchange rate assumptions. Firms noted that profits could decline 2.3% which marks a sharp contrast to the 19.7% estimated increase in profits for the previous year ending March 2018.

There is a high probability that profit forecasts will likely be revised down further especially if the Japanese yen continues to strengthen. Japan’s economy is however expected to continue with its moderate pace of recovery. Still, firms are expected to remain cautious especially on the exchange rate.

Overall, the BoJ’s tankan surveys showed that sentiment in the business outlook had reached its peak in the December quarter of last year. The diffusion index among the manufacturing firms was seen deteriorating from 24 in December 2017 to 20 in the current quarter starting April 2018.

The tankan surveys saw a muted reaction from the Japanese yen after the markets opened following the Good Friday holiday. Sentiment in the yen is expected to be influenced by the broader market sentiment.


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