Bank of Japan Tankan Underscores Mounting Deflationary Risk

December 15, 2008

 

  Bm Bnm Sm Snm All
Dec 1998 -49 -39 -56 -43  
Dec 1999 -17 -19 -32 -28  
Dec 2000 10 -10 -16 -23  
Dec 2001 -38 -22 -49 -39 -40
Dec 2002 -9 -16 -33 -36 -28
Dec 2003 11 -9 -13 -28 -15
Dec 2004 22 11 5 -14 1
Dec 2005 21 17 7 -17 5
Dec 2006 25 22 12 -4 10
Dec 2007 19 16 2 -12 2
Mar 2008 11 12 -6 -15 -4
Jun 2008 5 10 -10 -20 -7
Sep 2008 -3 1 -17 -24 -14
Dec 2008f -4 -1 -25 -31 -19
Dec 2008a -24 -9 -29 -29 -24
Mar 2009f -36 -14 -48 -42 -38

 

Diffusion indices in the above table were derived by subtracting the percent of respondents calling business conditions “unfavorable” from the percent characterizing such as “favorable.” The abbreviations for big manufacturers and big non-manufacturers are Bm and Bnm, while Sm and Snm designate small-sized manufacturers and non-manufacturers.  “All” signifies all big, medium, and small firms in the survey.  The suffix “a” stands for actual, and “f” signifies a forecast of the actual made three months earlier. The readings for big firms in December 2008 are substantially worse than what survey respondents had forecast three months ago but are close to what analysts were predicting last week. According to the latest survey, the results in March 2009 will reflect significant additional deterioration and be the weakest since 1Q02 for manufacturing firms, 1Q03 for large non-manufacturers, and 4Q98 for small non-manufacturers. Respondents in the survey assumed an average $/yen level of 101.04 from October 1st to March 31, 2009, which implies an unrealistically soft yen mean value of 103.6 between now and the end of March. If the yen is stronger than that level as I expect, business conditions ought to be worse than predicted in the bottom-most row shown above.

The newest survey revises expected fiscal 2008 investment down 3.1 percentage points for large manufacturers to 2.4% and down by 1.5 percentage points to minus 2.8% for all firms. Downward revisions in expected profits were substantial; all firms are expected to post an average 12% drop in earnings this fiscal year. Expected sales were also revised lower. Inventories, capacity, and employment are each considered more excessive now than three months ago. The lending attitudes of financial institutions are much tighter than three months ago as well.

Japan’s descent into a severe recession has produced a profound and immediate shift in inflation perceptions, flagging a significant risk that deflation is returning. The diffusion index of output prices (rising minus falling) shifted from +11 in September to -4 in December for big firms, who also anticipate a reading of -18 in the March 2009 survey. Small firms reported a similar progression from +8 last September to -5 now and an expected reading of -22 in March.

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