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Japan Business Confidence Q2 2019

Japan: Business sentiment among big manufacturers plummets to near three-year low in Q2

According to the Bank of Japan’s quarterly Tankan business survey, sentiment among large manufacturers in Q2 2019 fell to the lowest point since Q4 2016, reflecting concerns over rising trade protectionism and slowing global economic growth. The closely watched business confidence index for large manufacturers declined from 12 in Q1 2019 to 7 in Q2 2019, undershooting the 9 reading that market analysts had expected. The Tankan business survey is calculated by subtracting the number of respondents who say economic conditions are improving from those who say they are deteriorating. A positive reading means optimists outnumber pessimists.

The forward-looking indicator for the next three months inched down from 8 to 7, indicating that big manufacturers are less optimistic about business conditions.

The survey also showed that large firms expect capital spending to increase 7.4% in the financial year to March 2020, below the 8.9% expected by market analysts.

Large manufacturers forecast that the Japanese yen will average 109.3 JPY per USD in the second half of the 2019 fiscal year, which ends in March 2020.

Lastly, confidence in non-manufacturing firms rose from 21 in Q1 2019 to 23 in Q4 2019. Improved economic sentiment among non-manufacturing firms led some analysts to speculate whether the Q2 2019 print paves the way for Prime Minister Shinzo Abe to hike the sales tax in October as planned. Hiromichi Shirakawa and Takashi Shiono, economists at Credit Suisse, explained that:

“The survey showed decoupling in sentiment between manufacturers and non-manufacturers […] This suggests that corporate activities are unlikely to indicate any major slowdown at least for the time being, in particular in a situation where additional import tariff increases in the US are on hold. We think that the survey is essentially supportive for the scheduled VAT hike in October and a wait and see stance by the BoJ. Yet, we need to remain vigilant if the US monetary authorities are communicating sequential rate cuts which could lead to a substantial drop in the USDJPY.”

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