Japan: BOJ’s Tankan shows large manufacturer DI improves less than expected - Nomura

Takashi Miwa, Research Analyst at Nomura, notes that BOJ’s March Tankan survey shows that improvement in large manufacturer business conditions DI was smaller than market consensus forecast.

Key Quotes

“The BOJ's March 2017 Tankan showed the current business conditions DI for large manufacturers at +12 and the current business conditions DI for large non-manufacturers at +20, both up two points from the December 2016 survey. The improvement in the DI for large manufacturers was smaller than the median Bloomberg consensus forecast of a four-point improvement, while the improvement in the DI for large non-manufacturers slightly surpassed the consensus forecast of a one-point improvement. It appears that many large manufacturers are still cautious regarding the overall environment for exports, with the average forex assumption for FY17 set at a somewhat conservative USD/JPY 108.43, and we think this may have held back the improvement in the business conditions DI.” 

“Results not inconsistent with an export-driven economic recovery

At the same time, business conditions DIs for medium-sized and small manufacturers showed comparatively sharp improvement, up five and four points respectively from the December 2016 survey, and we think these figures may reflect the improvement in exports and production activity more straightforwardly. We thus do not think the results of the Tankan overall are inconsistent with the view that the Japanese economy is headed toward a recovery driven by exports.”

“Results suggest economic recovery could promote reacceleration in capex

Capex plans for FY17 (including land purchases, excluding software investment), came in at -1.3% y-y at companies of all sizes. While it is important to take into consideration the sharp downward revision to FY16 plans (-1.4ppt), this figure is slightly higher than the -4.8% reading for FY16 plans as of the March 2016 survey, so we think these can be viewed as relatively strong initial capex plans.” 

“While we think this Tankan shows lingering caution in the business condition assessments of large manufacturers, we see the results as consistent with our view that an export-driven economic recovery should promote a reacceleration in capex heading into FY17.”