Japan: Tankan strong at headline level - ING

The newsflow out of Japan is relentlessly strong currently, and the latest BoJ Tankan survey of business sentiment (amongst other things) does not buck that trend, explains Rob Carnell, Chief Economist at ING.

Key Quotes

“All of which suggests that the JPY can strengthen further without doing undue damage, and that it is going to be harder for PM Abe to weasel out of a 2019 consumption tax hike, if the economy continues to run strong, and if he manages to win the upcoming election.”

“Markets usually focus (for mainly historical reasons) on the large manufacturing firms’ diffusion index, which jumped 5 points to +22 (consensus +18, prior +17, INGF +19) - a pretty impressive leap. Although we would caution that it is a somewhat backward looking indicator. Nonetheless, it still provides verification that the Japanese economy is on a roll, and with momentum like that, the chances are that it will remain strong in the months ahead.”

“That said, if you dig into the figures, the increase is more nuanced. Even within the large manufacturing sector, some sectors slid back: ceramics, metals (ferrous. non-ferrous and processed), food and beverages, shipbuilding and heavy machinery – basically, all the “old economy” sectors .But this was offset by (sometimes outsize) gains in chemicals, petroleum and coal, general machinery, production machinery, business machinery, and lumber.”

“Profits were generally stronger across all sectors, and where still negative, mainly in the non-manufacturing sector, they were less negative than at the last survey in June. This may give rise to thoughts that wages growth may start to benefit more in the coming quarters, supporting domestic demand. That is not a given.”

“Whatever happens, we can’t see an exit strategy for the BoJ’s QQE policy. Asset buying and bond yield targeting looks likely to continue for the foreseeable future, probably longer.”