Abe's dreaming

by Glenn Dyer

"Despite early reports which suggested that the important September quarter Tankan, or survey of Japanese business sentiment, was a bit better than expected, gloom quickly set in when the figures were analysed.
The upshot was that rather than ‘improving’ as suggested in early reports, there was a noticeable fading in optimism in the Tankan, which is conducted quarterly by the Bank of Japan with over 10,000 companies of all sizes in Japanese manufacturing answering questions on their view of current and future conditions, especially for key areas such as investment and the value of the yen.
What is clear from the survey is that medium and small Japanese companies are much less optimistic than their larger peers.
In fact the survey showed that optimism has faded across all industries in Japan six months after the April 1 boost to the country’s sales tax which helped produce the sharpest contraction in GDP (an annual fall of 7.1%) since the Lehman Brothers collapse in the last four months of 2008.
The Tankan showed that a key measure of confidence among Japanese companies slipped three points to 4, thanks to more downbeat readings from companies of all sizes.
That’s not a good reading for the economy or for countries such as Australia which are looking to major economies such as Japan, China, the US and Europe to boost growth and help stimulate their economies.
Though the index remains much higher than the very readings before Prime Minister Shinzo Abe won the election and came to power in late 2012, it represents the second drop in a row since the peak reading of 12 (a two decade high) in the first quarter Tankan.
The survey is more important in Japan than other monthly or quarterly surveys of business - because longevity and the fact that it comes from the country’s central bank.
It is the quarterly equivalent of those monthly surveys of manufacturing conducted by Markit in China and a host of other economies, and by the Purchasing Managers Institute in the US.
Japanese economists, regulators and business place a great deal of importance on surveys that try and measure the optimism or otherwise of business. The Tankan indexes represent the percentage of executives reporting “favourable" conditions minus those reporting an "unfavourable" environment.
(A reading above zero indicates optimism, whereas the Markit surveys have a reading of 50 as the cut off for expansion (above) or contraction (below).
The headline index covering Japan’s large manufacturing enterprises during the July-September period inched up to plus 13 from plus 12 in April-June. That beat forecasts for a reading of 10.
But the rest of the report, however, wasn’t as optimistic: Large non-manufacturers saw a result of plus 13, down from plus 19 in June, with the group forecasting a slight rebound to plus 14 for the December quarter.
Headline Japanese numbers mask underlying weaknesses
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Medium-sized manufacturers fell to plus 5 from plus 8, while small manufacturers turned pessimistic, falling to minus 1 from plus 1. Medium non-manufacturers dropped to plus 7 from plus 10, while small non-manufacturers also retreated, dropping to zero from plus 2.
They seem to be feeling the pain of the weaker yen, which is helping bigger companies more by making their exports more price competitive (though not to the boost where we have seen a dramatic rise in Japanese exports in the past year).
The weaker yen will make the price of Australian exports such as LNG, coal, iron ore and rural commodities more expensive, which could be damaging.
Large companies raised their investment plans for the current financial year ending in March to a 8.6% increase from a 7.4% rise. Their forecasts were the highest reading since September 2007. That was the big surprise from the survey and belies the fall in optimism.
The Financial Times points out that the "The Tankan survey is seen as a key guide for the central bank as it formulates monetary policy. The BoJ’s policy board meets for a two-day policy meeting next week, with most economists expecting it to keep its settings on hold while moderating its language in its assessment of the economy.”
The central bank will also have to consider the mixed reading from the usual end of month data for the Japanese economy, release earlier this week.

Industrial production unexpectedly falling 1.5% in August, in a possible sign April’s sales tax increase is still pressing on demand. The seasonally adjusted fall in output followed an 0.4% rise in July and market forecasts for a rise of 0.3%.
Household spending down 4.7% year on year in August, despite stronger retail sales. But the fall in household spending was slower than the 5.9% (annual) drop reported in July.
However car dealers and retail stores reported a build up in unsold stocks - business inventories rose 1% in the month and that seems to be holding down demand for new goods and output. But businesses surveyed reckon they will have boosted output by a huge 6% in September, slowing to an 0.2% rise in October.
And the country’s employment picture improved noticeably with the unemployment rate falling to 3.5% month on month in August from 3.8%. That was a surprise because most forecasts had projected little if any change.