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July Tankan Survey Holds at March Levels

The 133rd edition of the Bank of Japan’s Tankan survey was published this morning, and seems to add further weight to the position that the Bank of Japan will raise interest rates again sooner rather than later. The Tankan shows business sentiment amongst large manufacturers to be exactly where it was last time, at 23.

When the April report was released, it was news that the 23 score was the first drop in a year, and that was seen as a sign that the Bank of Japan could not raise interest rates just yet. This time, media sources are reporting the score as a sign that the BOJ will likely raise interest rates in August - which I finally came out and said would happen on June 21. In that piece, I was discussing Morgan Stanley Chief Economist Takehiro Sato’s writings on the upcoming Tankan survey. Today, after the Tankan was released, Sato had this to say to Bloomberg: “The survey confirms the healthy sentiment of large companies and solid prospects for the economy.”

Although this is true, the survey also shows darkness on the horizon. The future forecast levels are down, not up. Companies say that will spend more in the coming fiscal year, but they seem worried about rising costs.

What should worry them just as much is the lack of price inflation in Japan. One reason BOJ governor Fukui has given for sluggish CPI growth has been the spike in gasoline prices last year. He thinks once those are flushed out, CPI will show appropriate levels. Claus Vistesen of Japan Economy Watch recently took this on, and shows a simple chart with inflation, core inflation and core inflation without fuel costs. His chart shows dangerous things once fresh food and energy are stripped out, and little reason to be positive about inflation growth for the future. In other words, CPI prospects for June don’t look much better than they have over the past few months, when they’ve been consistently down.

Back to the Tankan. These two charts show the Tankan scores since mid-1973 (Manufacturers are on the right and non-manufacturers on the left). It seems as though we need to be asking whether or not the current high cycle has already peaked, especially as firms have said they intend to spend more while revising downward their profit projections for this financial year. Click to view a full-size version…

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