According to the BoJ March Tankan Survey, the business conditions of Japanese companies improved in the first quarter of 2017.
The improvements seem larger for manufacturers than for non-manufacturers. Large manufacturers saw their business condition improve for two consecutive quarters. The business condition of small manufacturers improved for three consecutive quarters and renewed its high since the Lehman shock. Manufacturers are benefiting from the weak yen and a steady expansion in their export volumes.
Tankan business condition DIs have high correlations with the level of profits for the same quarter. Thus, judging from the improvements in March, Japanese companies likely renewed their historical high in profits in the first quarter of 2017.
Japanese companies seem more positive regarding their capital expenditure outlook. Their capital expenditure plans including software in the fiscal year 2017 show 1.5% year on year expansion. The figure 1.5% may seem weak, but Japanese companies usually start their fiscal year with a conservative plan and revise them upward as the year progresses.
We do see the relative under-performance of non-manufacturers in the Tankan survey as a sign of frailty though. Improvements in non-manufacturers’ business conditions seem limited regardless of the corporate size and they are still planning to cut their part of capital investments. In our view, manufacturers alone cannot sustain the recovery momentum. The March BoJ Tankan showed that an economic expansion is in progress in Japan, but it is still largely dependent on exchange rates and the global economic conditions.
Brief overview of “Tankan”
Tankan is a short-hand in Japanese for Tanki Kansoku, meaning Short-term Observation. The statistics is officially named in English as “Short-Term Economic Survey of Enterprises in Japan”. Tankan surveys a total of 10,000 companies on their various business conditions and the results are one of the speediest indicators for corporate earnings. As you can see from charts below, Tankan’s quarterly business condition DI results have very high correlations with the operating profit for quarter and Tankan results are published well in advance of most corporate disclosure for the quarter. For this reason, Tankan results attract close financial market attention, although in recent years the results do not move the market as much as they used to. Besides business condition DI, Tankan includes a whole set of DIs such as employment condition DI that gives indication on corporations’ need for additional hiring.