MARKET MOVER - BNP PARIBAS - Investment Services India
MARKET MOVER - BNP PARIBAS - Investment Services India
MARKET MOVER - BNP PARIBAS - Investment Services India
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Japan: Tankan to Remain Upbeat<br />
• The September Tankan will likely show that<br />
the corporate sector continued to recover in Q3,<br />
albeit at a slower pace than in Q2. We expect the<br />
current conditions DI of large manufacturers to<br />
rise by 6 points to 7, with that for large<br />
manufacturers picking up 4 points to -1.<br />
• Despite the pressure from the strong yen on<br />
margins, corporate profits probably continued<br />
to increase in Q3 due to the ongoing recovery in<br />
sales volume.<br />
• We expect capex plans (FY 2010) of large<br />
firms to be little changed, with projections of a<br />
3.0% increase for manufacturers (3.3% in June)<br />
and a 2.6% rise for non-manufacturers (2.4%).<br />
Capex is on the mend, but it is hard to expect<br />
businesses to adopt a more aggressive stance<br />
in the near term due to global uncertainties and<br />
yen appreciation.<br />
Improvement in business confidence continues<br />
The September Tankan, due out on Wednesday 29th,<br />
should show that business sentiment continued to<br />
improve, albeit at a slower tempo compared to the<br />
previous survey, with the current conditions diffusion<br />
index (DI) rising to 7 for large manufacturers (1 in the<br />
June survey), -1 for large non-manufacturers (-5), -14<br />
for small manufacturers (-18) and -23 for small nonmanufacturers<br />
(-26). The DI for the corporate sector<br />
as a whole should improve to -11 (-15).<br />
Neutralising strong yen<br />
With the yen having substantially appreciated since<br />
the last survey, attention will be on how much fallout<br />
the currency will have on business confidence this<br />
time around. Even after the intervention by the<br />
Japanese government, the dollar-yen rate is still<br />
running about 5 yen stronger than what firms, on<br />
average, had expected for the second half of FY<br />
2010 in the June survey. This naturally squeezes the<br />
earnings of exporters, inflicting particular damage on<br />
small manufacturers as they have less resistance to<br />
currency appreciation. Besides casting shadows over<br />
profit forecasts, it is also likely that the strong yen will<br />
adversely impact business spending plans to some<br />
degree, as the drop in share prices triggered by yen<br />
appreciation is eroding corporate sentiment.<br />
That said, manufacturers’ sales in Q3 likely<br />
continued to expand solidly, as exports carried on<br />
growing, and the termination of domestic subsidies<br />
30<br />
20<br />
10<br />
0<br />
-10<br />
-20<br />
-30<br />
-40<br />
-50<br />
-60<br />
-70<br />
Chart 1: Business conditions DI,<br />
Large Enterprises<br />
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10<br />
Source: BoJ, <strong>BNP</strong> Paribas<br />
Non-manufacturers<br />
Manufacturers<br />
*Q3 2010 figure is <strong>BNP</strong> Paribas' forecast.<br />
for buying eco-friendly cars triggered a rush in lastminute<br />
demand. (The yen on a real effective basis –<br />
an indicator of international competitiveness – is still<br />
weak compared with its average of the past 20<br />
years). We judge that corporate profits continued to<br />
grow in Q3 as sales growth more than offset the<br />
impact of the stronger yen on margins. Incidentally,<br />
manufacturers’ sentiment continued improving in the<br />
first half of 1995 when the yen was significantly<br />
stronger than it is now. Thus, while the rate of<br />
improvement in current conditions DI will likely be<br />
slower than that of the June Tankan, the direction<br />
should still be one of improvement, confirming that<br />
the recovery in the corporate sector is on track.<br />
Uncertainties to weigh on outlook<br />
Of course, there are still strong uncertainties about<br />
the direction of the global economy, to say nothing<br />
about the unstable FX market. In Japan, there are<br />
concerns about what might happen to the economy<br />
when the programmes stimulating consumer<br />
spending end, coupled with fears of policy paralysis<br />
owing to the chaotic political scene (divided Diet,<br />
disunity within the ruling DPJ). As all of these factors<br />
are negative for business sentiment, the DIs for<br />
future business conditions will likely be generally<br />
weak. But even if the DIs for future business<br />
conditions deteriorate, it does not necessarily follow<br />
that the actual Tankan in December will follow suit.<br />
Improvement in manufacturers’ mood slows<br />
As indicated above, we expect the squeeze on profits<br />
from yen appreciation will be the main reason why<br />
business sentiment of large manufactures will<br />
improve just 6 points compared to the very robust 15-<br />
Ryutaro Kono/ Hiroshi Shiraishi 23 September 2010<br />
Market Mover<br />
16<br />
www.GlobalMarkets.bnpparibas.com