Bank of Japan’s December Tankan survey shows dropping business sentiment

December 15, 2007
By Ken Worsley

A week before the Bank of Japan released its quarterly Tankan (Business Sentiment) survey yesterday, we predicted a fall in sentiment amongst large manufacturers, and said that we might again see a situation coming in which sentiment at nonmanufacturers moves higher than that of manufacturing firms.

We were hardly alone in expecting a drop in the score for manufacturers; most sources I follow and people I’ve talked to had expected something in the 20-22 range. Given that the score for sentiment at large manufacturers was 23 in the September survey, it seems that most sources were expecting a drop of 1-3 points.

However, we saw a fall to 19 points at large manufacturers. Amongst major nonmanufacturers, the score fell to 16, which was also a fall of four points. Thus, we still see the same gap between large manufacturing and nonmanufacturing firms, though we still project this to close over the coming two quarters, as the sentiment at manufacturing firms is expected to drop faster than that of nonmanufacturers.

It is worth noting that sentiment at export-driven firms improved, which is a sign that demand from Asian nations has remained strong enough to compensate for any lag in US consumption. At the same time, we do not feel that Japanese exports have yet felt the full brunt of pains derived from the subprime crisis. It may take some months yet for the truly difficult time to get worked through.

The survey does, however, show that firms intend to continue with plans for capital expenditure. The projected figure for capital investment increases at large firms was revised upwards from 9 percent to 10.5 percent. Medium size firms are expected to increase capital expenditure by 3.3 percent, while small firms are expected to cut down investments by 4.6 percent. At the same time, it must be noted that the risk of economic downturn has increased, and the results of this survey seem sure to put the nail in the coffin on any interest rate hike for the next three months.

Filed Under Bank of Japan, Business, Economic Reports, Tankan

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