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Japan big manufacturers see stable outlook

Japan big manufacturers see stable outlook

Japan big manufacturers see stable outlook
July 01
04:54 2016


©Bloomberg

Japanese business conditions held firm in the second quarter and the labour market is at its tightest in almost 25 years, according to new data offering some encouragement on the health of the world’s third-largest economy.

The Bank of Japan’s quarterly tankan index measuring business sentiment showed a reading of +6 for large manufacturing companies’ confidence in June, unchanged since March, and better than analyst expectations of +4.

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The closely watched index subtracts the number of respondents with a gloomy view on business conditions from the optimists. A positive reading means more see a favourable outlook.

Resilience in the tankan suggests that companies are not yet taking a hit from this year’s rise in the yen, making it more likely that Japan can sustain modest economic growth this year.

As such it somewhat reduces pressure on the BoJ to expand its monetary stimulus at the end of July. Inflation continues to slide, however — with the headline consumer price index down by 0.4 per cent on a year ago — which many analysts reckon makes further easing more likely.

Smaller companies were in less bullish mood. The tankan figures weakened for medium-sized manufacturers, down from +5 to +1, while the number for big service companies was off from +22 to +19. For all companies, the index was down from +7 to +4.

There were also signs of trouble ahead. Large companies have lowered their exchange rate forecast for the year from Y117.46 to Y111.41, but that is still much higher than the actual rate of Y103, suggesting deeper cuts to profits and investment are in store.

“It is important to remember that the survey was conducted throughout June and therefore reflect the UK’s vote to leave the European Union only in part,” said Marcel Thieliant at Capital Economics in Singapore.

Given the notorious unreliability of some of Japan’s official statistics — gross domestic product is especially prone to large revisions — the tankan is the BoJ’s favourite way to track the economy.

The quarterly survey is similar to ISM polls of purchasing managers in the US, but samples more than 10,000 companies and has a response rate of almost 100 per cent. The maximum possible reading is +100, the minimum -100.

By industry, conditions picked up in commodity industries, with iron and steel swinging from -22 to -12. Confidence fell higher up the value chain, however, with auto industry conditions dipping from +5 to -2.

The Bank of Japan’s preferred measure of inflation, stripping out the cost of energy and fresh food, fell from a year-on-year rise of 0.9 per cent to 0.8 per cent. With further declines likely due to the stronger yen, it racks up pressure for the BoJ to act in defence of its 2-per-cent inflation target.

But Japan’s labour market continues to tighten, with the ratio of job openings to applicants up from 1.34x to 1.36x, the highest level since 1991. The unemployment rate held steady at 3.2 per cent.

Steady tightening in Japan’s labour market should eventually lead to wage inflation, pushing up prices — always providing that global economic conditions do not trigger a downturn before that can happen.

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