BOJ Tankan survey to head downwards - Nomura

Masaki Kuwahara, Research Analyst at Nomura, expects the BOJ Tankan survey current business conditions DI for large manufacturers to come in at +5, down 1pt on the March survey, and forecast that the same DI for large non-manufacturers will come in at +20, down 2pt.

Key Quotes

“We made reference to the Reuters Tankan and the QUICK Tankan. On a quarterly average basis, the manufacturing sector business conditions DIs for Apr-Jun 2016 in both the Reuters and QUICK Tankan surveys deteriorated by 1pt q-q. We think the squeeze on profits from yen appreciation weighed on sentiment. The business conditions DIs for the non-manufacturing sector also fell quarter-on-quarter in Apr-Jun in both surveys. We think this mainly reflects lackluster domestic and inbound consumer spending.

We forecast that the future conditions DIs will come in at +5 for large manufacturers, the same as the current conditions DI, and +18 for large non-manufacturers, 2pt lower. For the manufacturing sector, we think there will be a lull in the worsening in sentiment as increased external demand and recovery from the earthquake result in production itself being on an uptrend despite being weak. For the non-manufacturing sector, we find it difficult to envision triggers for an improvement in sentiment, such as a recovery in consumer spending or inbound demand.

We forecast that FY16 fixed investment plans on an all enterprises, all industries basis will be revised up to +1.5% y-y from -4.8% in the March survey. However, this would be a conservative upward revision when compared with the FY15 fixed investment plans in the June 2015 survey, which called for a rise of 3.4%.

Capex plans were also revised up in the Ministry of Finance's Business Outlook Survey for Apr-Jun released on 13 June, but were conservative compared with growth last year. We expect a similar revision to fixed investment plans in the BOJ Tankan survey in view of global economic uncertainty and financial market instability, despite there being strong upgrade investment demand in Japan. The Business Outlook Survey was conducted on 15 May, when USD/JPY was around 109. Although the yen has appreciated further in June, we do not think there will be a sharp downturn in fixed investment plans as long as USD/JPY does not go substantially below 100.”