The Bank of Japan’s quarterly Tankan business survey is seen as a vital guide to corporate Japan’s expectations and more importantly, a key indicator of spending and investment plans.
It is also, as MoneySupply once noted, “one of the best bits of economic data in the world: how many other business surveys cover 11,528 companies with a 98.7 per cent response rate?”
That’s why it is particularly heartening to see further signs of flexibility at the BoJ – which has been particularly responsive since the March 11 earthquake, tsunami and nuclear radiation crisis.
The Q2 Tankan release, on Monday, would seem perfect for a quick reading on the impact of the March 11 disasters on business, as it was (ostensibly) conducted between Feb 24 and Mar 31.
But like everything in Japan, schedules are meticulously micro-managed and the deadline for submitting the Tankan survey forms was actually March 11. As JPMorgan economist Masamichi Adachi points out in a Monday note, 70 per cent of companies invariably return their forms on time. In another indicator of Japanese diligence, the tankan response rate this time was 95.6 per cent (out of 11,101 companies) just 3 percentage points points lower than the average response rate in 2010 of 98.8 per cent.
This time, however, the BoJ divided the data between the first lot of responses, up to March 11, and the latecomers, who responded after the disasters.
Intriguingly, there was little difference. The Tankan’s large manufacturer March diffusion index was +7 for pre-earthquake respondents and a similar +6 for post-earthquake respondents. The large nonmanufacturer DI actually rose – indicating growing confidence – from +1 to +6.
But, as Goldman Sachs observes in a Monday note: “It may not be appropriate to compare the pre- and post-earthquake DI levels. One factor is that only about 30% of the survey replies postdate the earthquake…Comparisons are more feasible for the outlook, ie the extent of change expected from here. The outlook calls for severe deterioration.”
Indeed, RBS Securities went as far as to call the latest Tankan “anticlimactic” and “less credible” (we assume from previous surveys), noting:
We had expected the DI to decline significantly before the release, as was seen in the already released survey data conducted by media, so today’s result looks anticlimactic.
The “6″ reading in fact has been largely discounted by analysts and markets, which are looking further down the track. As Bloomberg reports on Monday:
Japan’s large manufacturers expect business confidence to slump in coming months after the nation’s strongest earthquake on record devastated the northeast region on March 11.
The quarterly outlook index of sentiment among big manufacturers is seen falling to minus 2 in June from 6 in March, which would be the lowest reading in a year, according to a breakdown of the Bank of Japan’s Tankan survey released today. A negative number means pessimists outnumber optimists.
The report underscores the blow to corporate sentiment as damage to factories and power shortages limit production and Tokyo Electric Power Co. struggles to stem radiation leaks at a crippled nuclear plant. At the same time, the projected deterioration in confidence wouldn’t be as bad as during the financial crisis, when the measure plunged to a record low of minus 58.
A quick phone around of Tokyo-based economists confirmed that nearly all feel that the survey does not come near to capturing the extent of deterioration in business confidence since March 11.
JPMorgan’s Adachi cites an earlier monthly survey of business confidence issued late last week by financial data provider Quick. The DI in Quick’s survey, he explains, is similar to the BoJ’s, and divides respondents’ perceptions of business conditions into “good”, “bad”, and “not so good” – the last being counted as neutral.
Using a sample of 198 large companies (79 of them manufacturers), against a usual total of 470, the survey found that Quick’s business conditions DI of large manufacturing fell to -20 from +16 in March (with 198 firms surveyed between Feb 28 and Mar 13). But on Friday, Quick updated the flash data with an increase of respondents to 141 manufacturers. He notes:
Unexpectedly, the current DI was revised up to -15, but the outlook reading of 3 months ahead was revised down to -21 from -18. Large nonmanufacturers’ current and outlook DIs were both revised down to -8 (from -2) and to -12 (from -7), respectively. The downward revision within a mere three days probably suggests that firms are sensing a worse-than-expected situation day by day.
Worth noting, he adds, are companies’ answers to the special survey asking them the key factor affecting business:
Out of 326 firms, 43% replied “power shortage in the Tokyo metropolitan area”; 38% said “concern about the fall in private consumption”; and 19% said “financial market movement, such as yen, equity, and energy prices”. The first two points are the main reason why we expect a large contraction of IP and consumption in 2Q.
Regardless of the tankan results, markets from now are looking to the BoJ’s monthly policy meeting this week, on April 6-7, which is expected to take more steps to boost liquidity.
As RBS notes, the Bank moved quickly after the March 11 quake, making available$265bn to banks and doubling its asset-purchase programme to Y10,000bn. This week, the big questions are: 1) When and how the BoJ will implement emergency loans at a fixed rate? and, 2) the BoJ’s response to speculation it would underwrite special bonds for reconstruction.
The Bank is also expected to endorse implementation of emergency loan schemes at its meeting. But on the reconstruction bonds, RBS notes, “We doubt the BoJ will adopt a positive stance on the underwriting matter in order to avoid the one-sided pressure from the government and to escape the risks to monetisation”.
Related links:
Edward Chancellor: Last chapter in Japan’s deflation saga - FTfm
Japan – to buy or not to buy? – FT Alphaville
Don’t bet on Japanese repatriation – FT Alphaville
Who’s been buying Japan like crazy? – FT Alphaville