Preview of Bank of Japan Quarterly Business Survey

June 30, 2008

The Tankan survey gets released at 23:50 GMT tonight and is expected to reflect an additional deterioration of business conditions, the weakest capital spending plans in six years, and scant profits.  The diffusion indices of business conditions in the March 2008 survey had their weakest values since 4Q03 for both large and small manufacturers.  The index for large non-manufacturers was at its lowest level since 1Q05, and that for small non-manufacturers was its worst since 3Q04.  Participants in the March survey predicted an average $/yen rate of 109.21 in the fiscal year to March 2009.  All large firms then had projected a 5.3% decline in investment spending this fiscal year (-1.6% for big firms and -24.2% for small ones).  It is normal for firms to gradually lift their investment plans the deeper one moves through the fiscal year.  The recent trend in the diffusion indices is documented below.


  Big Mf’g Small Mf’g Big Nonmfg Small Nonmfg
Dec 2006 25 12 22 -4
Mar 2007 23 8 22 -6
Jun 2007 23 6 22 -7
Sep 2007 23 1 20 -10
Dec 2007 19 2 16 -12
Mar 2008 11 -6 12 -15


Among all 10,700 firms surveyed, the diffusion index swung from +10 in December 2006 to -4 as of March 2008.  This will be even more deeply in the red in tonight’s new data.  At times when a change in monetary policy is in play, the Tankan survey exerts considerable influence on the timing of such a move.  The survey contains more timely information than other economic data, is extremely comprehensive, and is the direct property of monetary officials.  However, policy is presently boxed into a wait-and-see accommodative mode.  The targeted interest rate is only 0.5%, leaving scant scope for stimulus, and money and lending growth rates remain low.  A return to quantitative easing would require a true deflationary crisis, which is not the case now.  Higher energy costs have lifted core inflation, which excludes fresh food but not energy, to a ten-year high of 1.5%.  (Inflation is still in the red at -0.1% if the impact of energy is also excluded.)  Indicators of demand point south, so there is no thought of raising rates for the balance of this year at least.



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