Japan: Tankan survey - not bad!

Most of the knee-jerk response to any Tankan release is the large manufacturing firm index. Although manufacturing accounts for only 21% of total Japanese GDP, and large firms probably only about 50% of that, the link between the manufacturing cycle and overall economic business cycle in Japan is tighter than in many more service driven economies (the US, or the UK for example).

The 4Q18 Tankan shows the rate of activity remaining strong, in contrast to the very weak 3Q GDP results, with the index steady at 19. This, in our view, is a better indication of the underlying strength of the Japanese economy than the prior GDP figures.

The same message played out in other parts of the survey, where overall index levels remain consistent with ongoing, and in some cases, slightly improved growth from 3Q18. As such, we feel that there is a good chance that the 4Q18 GDP figures, when released next year, will show a strong bounceback from the apparent weakness of the preceding quarter, leaving overall GDP growth only a little shy of 2.0% - a very creditable performance for Japan.

Many people don't get past the Tankan's headline large manufacturing index, but the beauty of this survey is the depth of other material buried in its guts.

Profits data is a good place to start. The profits figures for 2017 were very strong as Japan and the rest of Asia picked up from 2016 weakness. Profits and net income figures for 2018 look far less impressive, which gives us some concern looking ahead to 2019.

Notwithstanding that, figures for fixed investment, R&D and software investment look robust, though land purchases not so much. Survey data on the financial conditions of firms remains solid, and firms continue to report insufficient employment (tight labour markets) which will hopefully keep wages growth supported into 2019, underpinning consumer spending growth.

We continue to expect the Bank of Japan (BoJ) to reduce its purchases of government bonds and other assets. Though their attempts to pursue a taper by stealth have been somewhat undermined by the very boring nature of the ECB's own taper, which provides less cover for any overt move in Japanese monetary policy. Japanese Government Bond yields are currently only 0.05-0.06%, so show little sign the BoJ is changing its JGB yield target . Governor Kuroda has hinted that this will be the clue that policy is changing. So until and unless JGB yields push above 0.1%, it will remain a case of "Nothing to see here" for forthcoming BoJ meetings.