Japanese "Tankan" Business Survey Reveals Further Japanese Slide Into Recession

The quarterly business survey compiled by the Bank of Japan broadly classifies six categories of firms: big, medium, and small manufacturers and non-manufacturers. Respondents are asked if conditions are favorable or unfavorable, and the percentage of the latter is subtracted from the percentage of the former to produce a diffusion index. A negative diffusion index thus signals overall pessimism, since more firms would then be calling conditions unfavorable than favorable. In each classification, actual results in the September survey were weaker than what respondents in June thought they were likely to be, and each September result was worse than the actual June diffusion index. Moreover, each class of company expects weaker values in December compared to conditions in September. The latest diffusion indices for big manufacturers was pessimistic on balance for the first time since mid-2003. The index for big non-manufacturers was only +1, worst since September 2003, and the index for all 10,488 firms participating in the survey was at -14, 16 points lower than at the end of 2007. All firms revised down projected investment for the current fiscal year to a gain of 1.7% from 2.4% that had been predicted in June, and they opined that profits are likely to tumble by 8.1%, about twice as much as the 4.4% drop projected in June. Employment growth intentions were reduced, and inflation expectations are lower too than three months ago.

Some history of the business condition diffusion indices are shown below. The abbreviations for big manufacturers and big non-manufacturers are Bm and Bnm, while Sm and Smn designate small-sized firms. All signifies all big, medium, and small firms in the survey. The suffix “a” stands for actual, and “f” signifies a forecast of the actual made three months earlier.

Under normal circumstances, the September Tankan survey would likely herald a near-term easing of monetary policy. The Tankan survey historically had special influence over Bank of Japan policy because the survey is proprietary to the central bank. The Tankan provides very comprehensive information covering all aspects of production, demand, inventory and employment decisions, price expectations, assumptions about future interest rate and yen levels, and perceived financing availability. It also has important advantages to hard data in terms of timeliness. With a target rate of just 0.5% on uncollateralized overnight funds, Bank of Japan officials have been very reluctant to cut rates or take the more unorthodox step of reverting to a quantitative policy target, as used during the roughly five years to early 2006. Their view is that the recession will prove to be shallow. In 2005 when a very loose quantitative stance to combat deflation was in place, current account balances at the Bank of Japan averaged Y 32.75 trillion, far above what banks were required to maintain. That figure averaged Y 7.72 trillion per day this year through mid-September, in contrast, and their jump to an average daily size of Y 10.58 trillion in the second half of last month reflected a spike in quarter-end and fiscal half-end cash demands that the central bank accommodated. Balances fell by to Y 7.99 trillion today, and the overnight rate settled back to 0.468%.

Bank of Japan officials will release new semi-annual forecasts for growth and inflation at the end of this month.

Larry Greenberg
CurrencyThoughts