Bank of Japan Tankan survey signifies positive gap in Japan’s macro conditions…..
By Jesper Koll, Senior Advisor, WisdomTree
The latest Bank of Japan (BoJ) Tankan survey of Japanese business conditions points to an increasingly positive gap in Japan’s macro conditions.
While manufacturers have been pulled into global-slowdown-induced recession, the domestic small/medium sized non-manufacturing sector continues to expand. In other words, domestic demand appears to be de-coupling positively from the global cycle.
The Diffusion Index (DI) for large manufacturers dropped by a worse-than-expected 7 points; but it rose by 1 point for small non-manufacturers.
For policy makers, this is good news, but leaves no room for complacency. Clearly, the positive dynamics in the domestic service sector will be challenged by the hike in the consumption tax, due 1st October 2019. To counter this, the government has passed a fiscal package of 2 trillion Yen designed to off-set the loss of purchasing power. In our view, these measures will significantly off-set the negative demand impact from the tax hike on the non-tradable goods sector.
Personally, I do expect signs of an industrial upturn in the coming quarters.
China holds the key, with the combination of china policy stimulus plus a positive conclusion of the US-China trade talks poised to trigger a positive inflection in the global and Japanese industrial cycle.
Back in Japan, the Tankan result in planned business investment is adding fuel to cyclical optimism. For the new fiscal year in 2019 (FY2019), companies are budgeting a rise of 1.2%. While this is lower than the exceptionally bullish 2.3% flagged this time last year, it follows after an actually realized 10.4% surge in FY2018 capital expenditure (capex). So we are past peak momentum in the capex cycle, but the overall expansion continues.
What about the BoJ?
We maintain our call that Japan in 2019/20 is all about fiscal and regulatory policy, with the BoJ side-lined into non-action.
Two external factors could change this, one an earlier-than-expected rate cut from the Federal Reserve; and/or a China currency devaluation. Either way, fears of a BoJ exit from the current policy framework have now become fully asymmetric, tilted towards added ease. Personally, I expect no action until well after the 2020 Tokyo Olympics.
*The views expressed in this document are those of Jesper Koll, any reference to “we” should be considered the view of Jesper Koll and not necessarily those of WisdomTree.