BoJ Tankan signals improved business conditions

Chris Scicluna
Emily Nicol

BoJ Tankan signals improvement in business conditions in Q2 and notably higher investment intentions this year, but a slight easing in inflation expectations; labour earnings figures in focus at the end of the week
Today’s BoJ Tankan survey offered a comprehensive update on Japan’s business conditions in the second quarter, with firms reporting an improvement in the economic outlook as well as a slight easing in their inflation expectations to suggest that, on balance, the BoJ is again likely to resist amending the current policy framework at the Policy Board’s next meeting later this month. Among the key findings:

The headline large manufacturing diffusion index (DI) beat expectations, rising for the first quarter in seven and by a stronger-than-expected 4pts to +5, with increases in the DIs in 12 out of 18 subsectors. Notably, optimists outweighed pessimists in the autos sector (up 14pts to +5) for the first time in two years as supply bottlenecks eased. Despite easing slightly in Q2, sentiment was strongest in the sector among business-oriented and production machinery firms. Overall, however, the manufacturing DI was still the second-softest reading for two years. And despite expectations of further modest improvement in Q3 (up 4pts to +9), the vigour of recovery in that sector continues to lag significantly behind that in services.

Indeed, the headline non-manufacturing DI rose for the sixth consecutive quarter in Q2, by 3pts to +23, a four-year high. The improvement was led by the hospitality sector (up 36pts to +36, a series high), benefitting from the release of pent-up demand from the pandemic and the return of overseas visitors. Meanwhile, the wholesalers’ DI was the highest since 1991, and the real estate DI also rose back to its pre-pandemic level for the first time. But given the strength of the figure for Q2, perhaps it’s unsurprising that the headline non-manufacturing DI was forecast to fall back to +20 in Q3.

Despite a notable improvement from three months ago, and forecasts for positive sales growth this year, firms still anticipated a decline in profits growth in FY23 as a whole amid high cost burdens. Nevertheless, probably reflecting insufficient production capacity, as well as extra capex on digitisation, the green transition, etc., firms were remarkably upbeat about their investment intentions this year, revising up their forecast for capex growth by more than 5ppts to 11.8%Y/Y in FY23. Large firms forecast growth of 13.4%Y/Y, with manufacturers projecting an increase of 19.3%Y/Y.

With respect to inflation, while still elevated by historical standards, today’s survey reported a further easing in input cost burdens in Q2 for both manufacturers and non-manufacturers alike. And cost pressures were expected to moderate further this quarter too. Moreover, the respective output price indicators edged slightly lower too, suggesting that firms continue to absorb some of their extra costs. Indeed, perhaps most disappointing in today’s survey for the BoJ was the downwards revision to firms’ expectations for their own prices, forecasting a cumulative increase of 4.4% over the coming five years (down from 4.6% three months ago), with large firms forecasting a rise of just 3.0-3.2% over that period.

For now, at least, firms still expect CPI inflation to remain just above the BoJ’s 2% target in five years’ time (unchanged from the last Tankan survey). But this reflects higher expectations of small firms. Large firms are less convinced, forecasting inflation to fall back from around 2% in one year’s time to around 1½% in three- and five years’ time. So, while the updated economic forecasts of Policy Board members will certainly bring an upwards revision to its near-term inflation forecasts to reflect the recent stronger outturns, there was nothing in today’s Tankan to suggest that the BoJ will need to shift its forecasts over the medium term significantly higher.

Looking ahead to the remainder of the week, the main focus in Japan will be the monthly labour earnings figures for May on Friday. Having disappointed in April (average wage growth of just 0.8%Y/Y), these will be watched closely for signs of this year’s ‘bumper’ wage negotiation round starting to feed through. Friday will also bring the latest household spending and BoJ consumption activity data for May.

Payrolls data likely to suggest a moderation in job growth in June; ISM surveys and FOMC minutes also to come on a busy week for US data
While the week will be punctuated by tomorrow’s Independence Day holiday, it will nevertheless be a busy one for US economic data, not least with the June payroll report coming on Friday. The higher readings for initial jobless claims through the first part of the month point to a slowdown in NFP growth from the average of 314k per month in the year to-date. Daiwa America’s Lawrence Werther forecasts a gain of 250k, somewhat above the median on the BBG forecast (currently 225k). Following the prior month’s surprising 0.3ppt rise, the unemployment rate is expected to edge back 0.1ppt to 3.6%. And growth in average hourly earnings is expected to remain at 0.3%M/M for a fifth month in six. Beyond the labour market, today brings the June ISM manufacturing survey, with the equivalent services results due Thursday. Construction spending data for May also come today, with that month’s factory orders numbers (Wednesday) and full trade report (Thursday) also due. And the minutes of the June FOMC meeting, which left rates unchanged but signalled two more hikes before year-end, will be released on Wednesday.

ECB consumer expectations survey and PPI figures to offer further insight into near-term inflation outlook
Following Friday’s CPI estimates, this week will offer further insight into the near-term inflation outlook, with the release of euro area producer price figures and ECB monthly consumer expectations survey for May on Wednesday. Due to softer wholesale gas and food prices last month and significant base effects compared with a year ago, the headline PPI rate is expected to have fallen into negative territory for the first time December 2020. The final June PMI surveys – manufacturing (today) and services (Wednesday) – are also likely to reaffirm the easing in price pressures flagged in the flash releases, albeit with the services prices charged index remaining firmly above the long-run average. And following the marked slowing in activity in manufacturing and services sectors, the construction PMIs (Thursday) are also expected to signal ongoing contraction in the sector. In contrast, but consistent with a gradual improvement in consumer confidence, euro area retail sales figures (Thursday) are likely to report a return to modest growth in May.

Among the member state data releases, focus will be on May reports for German goods trade (tomorrow), factory orders (Thursday) and industrial production (Friday). Surveys suggest that the figures are likely to be subdued but orders should be boosted as one-off effects that weighed on the April level wear off. By the same token, German manufacturing output should be supported by a rebound in auto production. But total German IP will also be restrained by a decline in construction, which had temporarily flattered the April data.

BoE Decision Maker Panel survey results to offer further insight into firms’ output price and inflation expectations
In the UK, in a relatively quiet week ahead, the results from the BoE’s latest Decision Maker Panel survey on Thursday and updated inflation and output price expectations will be of most interest. In the three months to May, year-ahead output price inflation fell very slightly by 0.1ppt to 5.4%Y/Y. But even before the upside surprise to the official inflation data, CPI inflation expectations three-years ahead had ticked slightly higher in May (3.5%Y/Y). The final PMI surveys – manufacturing (today), services (Wednesday) and construction (Thursday) – will also offer updates on price pressures. While the flash PMIs implied the first decline in manufacturers’ output prices since April 2016, the services prices charged index remained well above the long-run average. Despite falling in June, the flash composite output PMI (52.8) remained in expansionary territory and consistent with modestly positive GDP growth in Q2.

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