Japanese Business Sentiment Optimistic

Investors would love to be able to see the future and thereby ensure that they back the right stock or currency pair to turn a healthy profit. Until the day that time travel is invented or somebody comes up with a usable crystal ball, the best tool at their disposal to get a feeling for the broader strokes of the near future are surveys of business opinion. Japan’s central bank sponsors the Tankan survey which is published four times per year and takes data from thousands of Japanese businesses, the bank uses it to shape monetary policy.

The most recent Tankan survey (published at the end of Q2) has shown that Japanese business sentiment has become positive for the first time in almost two years. The survey involves more than 11000 businesses out of the 213000 or so in Japan, so it provides a meaningful sample size which should map its predictions onto the real Japanese economy. These businesses have to have a market capitalisation of at least 20 million Yen.

The Tankan result for large manufacturers rose from a value of -8 to +3. It also indicated that these manufacturers intend to increase capital spending in the current financial year. Analysts have attributed the new found optimism to the softening of the Yen against other major currencies since the election of Mr Abe. The Yen has fallen by roughly a quarter against the Dollar since the end of 2012. This means that Japanese export goods are more competitive in importing markets. It also means that when foreign currency profits are repatriated to Japan, they are worth more Yen, boosting profitability. The downside of the weaker Yen is that it pushes up the cost of energy and raw goods which are priced in Dollars. Japan has been heavily reliant on fossil fuel imports for electricity production since the March 2011 earthquake and tsunami which led to almost all of the nation’s nuclear power stations being taken off-line for safety checks and political reasons.