In the BoJ September Tankan Survey, we see continued improvements in the business condition DIs. Large manufacturers’ DI improved markedly from 17 in June to 22 in September. Small businesses also saw improvements. DIs for both small manufacturers and small non-manufacturers improved in September from June.

The DI for large non-manufacturers stayed unchanged at an elevated level of 23 in September. Business condition DIs and corporate profits are well correlated and judging from these DI results, it seems assured that corporate profits in Japan have again renewed its historical high in the July-September quarter.

By industry, the majority of industries within manufacturing showed improvements between June and September except for steel, ferrous metal, and ship-building. General machinery seems to have done exceptionally well. Among non-manufacturers, corporate service businesses such as IT and wholesalers have done well, but we see a notable deterioration in business condition DI for communication, hotels and restaurants.

Overall, business sentiments seem reasonably upbeat. In comparison with the previous economic boom period of 2005-2007, one notable difference is the condition among small non-manufacturers. In 2004-2007, the peak of the business condition DI for small non-manufacturers was -6. A negative DI implies that respondents on net continued to voice deterioration in their profitability even during an up-cycle of the economy. In comparison, the DI for small non-manufacturers are reporting an improvement in their profitability, with the DI having improved to 8 in September Tankan results. In our view, one large difference between 2005-2007 and the current period is the behavior of commodity prices. While the rise in commodity prices during 2005-2007 compressed the profit margin of small non-manufacturers, the stable commodity price environment in the current phase is helping Japan’s small businesses improve their profitability.

Brief overview of “Tankan”

Tankan is a short-hand in Japanese for Tanki Kansoku, meaning Short-term Observation. The statistics are 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 the 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 an indication of corporations’ need for additional hiring.