MARKET MOVER - BNP PARIBAS - Investment Services India

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