What to Expect from BOJ Tankan Survey

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The Yen has been weakening gradually for several months with slowly increasing risk appetite as we keep getting hopeful signs from US-Chinese trade talks.

More recently, on Monday, we got Q3 GDP numbers. These caught the market by surprise showing significant growth in output. The news helped fuel the retracement that the yen has been having against major pairs so far this month.

Tomorrow we have the release of manufacturing data. This could show improving outlook for Japan, which might give the pair some extra weight if the USDJPY tried to break through the 108.30 support level.

There is some optimism that we might get a break in the trend this time around. But, there are some mitigating factors that have led many economists to expect disappointment.

What We Are Expecting

There are two extraordinary factors that could drag down the Tankan index this time.

The first is the impact of the sales tax hike in October. The second is the economic impact of Typhoon Hagabis.

This would imply that the underlying figure is higher than reported, indicating that the market might take a worse than expected result in stride.

The figure we want to pay attention to is the Tankan Large Manufacturing Index. Expectations are for this to dip to +3 from +5 in the prior release. That would be a continuation of the downward trend that started at the beginning of 2018. It would also be the worst result since 2013 (though the last report was the worst since 2013 as well.)

Reuters’ monthly Tankan survey, designed to predict the official figure, has been consistently negative since the last release. The consensus of economists might be a little over-optimistic.

The Other Figures

The bigger sector, though less influential for the currency, is the Non-Manufacturing Index. Expectations are for this to decline to 17 from 21 prior.

While this, too, has been trending down since early 2018, the slope hasn’t been as pronounced. This suggests that the domestic market remains more resilient.

We can expect the large manufacturing outlook to go slightly negative to -1 compared to 2 prior. This is largely attributed to the lack of concrete measures taken in the trade dispute.

Expectations are for Capex, on the other hand, to increase to 11.5% from 6.6% prior. This figure generally doesn’t affect the markets immediately. However, if Japanese businesses are increasing their investments, it could signal an expectation for the trend to turn positive in the near future.

What’s interesting to note is that small businesses are leading the increase in spending. This is compared to larger businesses (often more dependent on exports) that we’re expecting to cut spending during the first quarter of next year.

The Market Reaction

So far, the markets appear to have been pricing in a slightly worse set of data. If the Tankan Large Manufacturing Index were to move above 5, it could prompt a stronger market reaction, and actually weaken the yen (as a better domestic situation would improve the Nikkei). This would show a break in the trend.

On the other hand, deepening significantly into negative would prompt speculation that the BOJ might consider further intervention, which could also weaken the yen, especially against the dollar.

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