The Bank of Japan Monday released its quarterly Tankan business survey for September conducted from Aug. 29 to Sept. 30. The diffusion index is calculated by subtracting the percentage of companies reporting deteriorating business conditions from the percentage of those reporting an improvement. A positive figure indicates the majority of firms see better business conditions. The average dollar/yen exchange rate assumed by polled firms for fiscal 2016 was Y107.92 in September, compared to Y111.41 in June.
FACTORS: Business confidence in September was little changed among manufacturers and improved slightly among non-manufacturers from three months earlier as overseas demand is recovering while domestic demand is sluggish. Many firms remain cautious, forecasting a dip in sentiment three months ahead.
The diffusion index (DI) for sentiment among major manufacturers stood at +6 in September, unchanged from +6 in June, and is projected to remain at +6 in December.
About 70% of respondents answered by Sept. 12, which means the latest survey may not reflect any change in sentiment or inflation outlook among firms that might have been caused by the shift in the BOJ’s policy framework to focus on controlling the yield curve rather than the monetary base.
At its Sept. 20-21 meeting, the BOJ board decided in a majority vote to add control of the bond yield curve to its aggressive monetary easing, an attempt to undo some of the effects of its negative interest rate policy, which caused an excessively sharp flattening of the curve.
Current profits for major manufacturers are expected to drop 14.6%, worsening from -11.6% projected in June, as a relatively strong yen trims exporter profits.
The sentiment index for major non-manufacturers fell to +18 in September from +19 three months earlier. It is projected to slip further to +16 three months ahead.
In light of higher fuel costs reflecting a rebound in crude oil prices, business sentiment in the transport industry fell to +6 in September from +16 in June and is forecast to fall further to +3 in December.
The DI for smaller manufactures improved to -3 in September from -5 in June (the median forecast was -5), led by refineries and steel mills backed by a pickup in resource prices. But the index is expected to slip back to -5 in December due to continued uncertainty over the outlook for private demand and costs.
The index for smaller non-manufacturers rose to +1 from zero (the median forecast was +1) but is seen down at -2 in the next poll.
As for business investment, the key to a pickup in domestic demand, the September survey showed capex plans by major companies will rise 6.3% in the current fiscal year, below the median economist forecast of 6.7% but up slightly from 6.2% projected in June.
Capital investment by smaller firms is expected to fall 9.0% in fiscal 2016, revised up from -14.9% in June.
TAKEAWAY: The focus is on whether overseas demand and private consumption will recover and support capital investment in the coming months.
At its next policy meeting Oct. 31-Nov. 1, the BOJ board will review its medium-term growth and inflation outlook through March 2019. Inflation expectations among businesses in the September Tankan due out on Tuesday will provide a clue as to whether the outlook is being revised down again.
In the June survey, companies on average continued to revise down their inflation outlook for one and five years ahead from three months ago as core consumer prices, which exclude fresh food, continued to be weak and private demand remained sluggish.
The Bank of Japan is seeking to form an appropriate yield curve in order to hit its 2% inflation target under the new monetary easing framework adopted last week, Governor Haruhiko Kuroda said in a speech Thursday.
He said the BOJ would achieve its 2% price stability target “at the earliest possible time” by using both yield curve control and its three-year-old easing program made up of massive asset purchases and cash injections into the financial system.
Kuroda didn’t mention the BOJ board’s latest, often-delayed timeframe of boosting inflation to 2% and keeping it around that level “during fiscal 2017.”