Japanese business conditions held steady in the third quarter, according to the Bank of Japan’s closely watched tankan index, with signs that companies are adjusting to the stronger yen.
The closely watched index for large manufacturers was unchanged at +6, compared with analyst expectations of +7, while the all-companies, all-industries index edged up slightly from +4 to +5.
While the figures highlight the lack of momentum that forced the Bank of Japan to revamp its monetary stimulus last month, there is no sign of any downward spiral, suggesting the economy is still making some progress.
Given the notorious unreliability of some of Japan’s official statistics — gross domestic product is especially prone to large revisions — the BoJ’s preferred way of tracking the economy is the tankan.
A quarterly survey, it is similar to ISM polls of purchasing managers in the US but samples more than 10,000 companies and has a response rate of almost 100 per cent. Its indices subtract the percentage of respondents reporting bad business conditions from those reporting good, so readings can range from -100 to +100.
“Weak conditions in the manufacturing sector can partly be explained by the sharp strengthening of the exchange rate since the start of the year,” said Marcel Thieliant, senior Japan economist at Capital Economics in Singapore.
“However, the renewed fall in business conditions in the non-manufacturing sector, from +19 to +18, underlines that circumstances at home are worsening.”
Companies shifted their forecast for the yen from ¥111.4 against the dollar in June to ¥107.9 in the latest survey. While that is still weaker than the present ¥101.5 — suggesting further downgrades to profit forecasts ahead — it does suggest companies are adapting to the stronger currency without a collapse in confidence.
Corporate investment plans, one of the tankan indicators to which the BoJ pays closest attention, edged up by 0.1 percentage points to expected growth of 6.3 per cent for the year to March 2017.
A number of basic industries recorded better conditions, in line with stronger global commodity prices. Iron and steel moved up 12 points to a reading of zero. Export industries weakened, however, with shipbuilding and heavy machinery in the worst shape, down 22 points to a reading of -18.
In services, construction and real estate kept booming, with readings of +39 and +35 respectively. There was some weakness in retail, however, down four points to +7; and in business services, off five points at +29.
The Bank of Japan recently changed its policy framework, saying it would cap 10-year government bond yields at zero, while promising to overshoot its inflation objective of 2 per cent.
Despite moderate growth in the economy, it is struggling to push up inflation, with prices falling 0.5 per cent compared with a year ago in August.