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Japan’s Tankan index to back strong business sentiment – Forex News Preview
March 30, 2018 5:26 pmVideo
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Japanese business sentiment jumped to an 11-year high in the final quarter of 2017, marking five straight quarters of growth according to the Bank of Japan’s Tankan survey issued in December. On Monday, the same survey is likely to show that in the three months to March the positive business outlook among big enterprises remained resilient although earlier polls conducted by Reuters indicated that some risks are still hanging in the background.
Particularly, the Tankan index for big manufacturers is expected to remain unchanged at +25, meaning that large enterprises are still confident about business conditions in the next three months amid robust global growth and higher corporate profits, while big non-manufacturers could be slightly more optimistic, with the corresponding index said to inch up by 1.0 points to +24. On the other hand, smaller businesses are projected to back a less favorable picture, probably driving the Tankan gauge for smaller manufacturers and non-manufacturers lower by 1.0 points to +14 and +8 respectively.
Last Tuesday, Reuters’s Tankan polls based on opinions of 546 large and mid-sized companies showed that enterprises were experiencing a larger global demand for electronics while in general, customer orders were still elevated. Still, they highlighted that the rising yen, falling stock prices, and high-cost raw materials were weighing on their profits despite the impact not being so severe yet.
Indeed, the strong risk-off sentiment created since the beginning of the year mainly due to prospects that the Fed would raise interest rates faster than other major central banks and fears of a global trade war following Trump’s surprising decision to impose tariffs on steel and aluminum imports provided significant support to safe-haven assets including the yen. The Japanese currency jumped by almost 5.0% from January onwards, while the Japanese Nikkei 225 stock index tumbled by approximately 6.0% in the aforementioned period. Labor costs were also bothering firms, the previous survey showed, given the government’s efforts to push wages upwards to encourage consumer spending and the shortage of skilled workers in the market. Note that Abe’s ruling coalition approved a plan in December aiming to cut corporate taxes from 30.0% to 20.0% for the next three years from 2018 but only for those who are willing to increase wages and domestic capital spending. The plan, though, needs to go through parliament before it takes effect.
Turning to the trade front, Japan was one of the US’s allies that failed to get an exemption from Trump’s metal import tariffs and in contrast to South Korea, it refuses to start talks on bilateral trade partnership with the US. Even if Japan is not among major exporters of steel and aluminum to the US, tariffs could increase global prices and thus hurt Japan’s auto industry. On the other hand, if the Japanese steelmakers manage to get product exemptions, the economic pain could be softer.
Nevertheless, any surprising rise in the Tankan index is less likely to persuade BoJ policymakers to reduce monetary stimulus as the central bank has repeatedly argued that has no tensions to raise interest rates until inflation touches its target of 2.0%. Still, better-than-expected numbers could enhance the BoJ’s optimism on the country’s economic performance but the yen could be indifferent.
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