Japanese enterprise sentiment hits two-year excessive
Sentiment among major Japanese manufacturers has risen to its strongest level since the final quarter of 2018 as the global economy recovers from the coronavirus pandemic.
The Bank of Japan’s Tankan Index rose from plus 5 to plus 14 in the second quarter, slightly below analysts’ expectations of plus 15, indicating a robust expansion in production.
The mood in the service sector was disappointing, however: the index rose from minus 1 to plus 1 as Japan saw a wave of Covid-19 cases that triggered a state of emergency in major cities.
Widely regarded as Japan’s most reliable economic data set, readings from the Tankan indicated that Asia’s only G7 economy was well positioned for growth in the second half of the year.
Tom Learmouth, Japanese economist at Capital Economics, a consulting firm, said the tankan indicated that a weak start to the year would soon give way to a strong rebound. He predicted that Japanese production would return to pre-virus levels by the end of the year.
John Vail, chief global strategist at Nikko Asset Management, said the index indicates a robust outlook. “The tankan for large manufacturers showed that current conditions are well above their long-term average and not far from the highs of decades,” he said.
The Tankan is a survey on corporate sentiment, similar to a purchasing managers’ index, but unusually broad with coverage of almost 10,000 companies and a response rate of over 99 percent.
One of the questions asked is whether the terms and conditions are “favorable” or “unfavorable”. The latter is subtracted from the former to get an index that can range from minus 100 to plus 100, with values above zero indicating positive business conditions.
The conditions were particularly strong in sectors that supply Chinese manufacturers with capital goods. The index for production machines was plus 26 and for electrical machines it was plus 28.
However, Japan’s mainstay in the automotive industry fell from plus 10 to plus 3, likely reflecting the impact of semiconductor shortages on production.
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The service sectors affected by the state of emergency remained in the doldrums, with the index for hotels and restaurants at minus 74 and transport at minus 10. Under the restrictions that were only lifted in mid-June, restaurants have been asked not to serve alcohol and close at 8 p.m.
Companies are forecasting a 9.6 percent increase in capital spending this year, suggesting that business investment will fuel overall output growth, while companies reported a slight increase in labor shortages.
Economists generally expect growth to accelerate through the rest of 2021 as Japan’s Covid-19 vaccination campaign gains momentum. The country vaccinates about 1 percent of the population every day, and 23 percent of the population has received at least one dose.
