Japanese Businesses Starting to Feel Good About the Future?

Heads up! The freshly released results of the Tankan survey revealed that things are starting to look brighter for Japanese businesses. Before we figure out what this could mean for the BOJ’s monetary policy, let’s take a look at what this report is all about.

What the heck is the Tankan survey?

The Tankan survey is one of Japan’s most important economic releases. This report gauges the current state of the top businesses in Japan and gives an outlook for the upcoming quarters.

As such, the results of the Tankan survey are closely monitored by the BOJ. The central bank makes use of the data to assess the performance of Japan’s business sector and decide if any monetary policy adjustments need to be made.

The Tankan survey is published only four times a year (April, July, October, and December). Because of that, this particular report tends to have a larger impact compared to other data released on a monthly basis.

The survey takes a look at the manufacturing and non-manufacturing components of the business sector and comes up with an index for each. A positive reading indicates that the industry showed growth while a negative reading means that the industry contracted.

Q2 2013 Tankan Survey

Earlier today, Japan released its Tankan index for the second quarter of 2013. The results revealed that businesses are starting to see signs of light, as both manufacturing and non-manufacturing industries posted notable improvements.

The manufacturing index climbed from -8 to 4, higher than the estimated reading of 3, while the non-manufacturing index rose from 6 to 12. A quick review of the past results would show that Japan enjoyed back-to-back gains for both components and that the manufacturing sector showed its first positive reading since September 2011. Could this be a sign that “Abenomics” is starting to bear fruit?

What does this mean for monetary policy?

It’s important to note that the Tankan survey was done during a time when market uncertainty was high. This was when bond yields were rising and the Japanese equity market was experiencing a sell-off. Despite this, the survey respondents were optimistic, believing that conditions would probably improve in the following months. And from the looks of it, big companies saw that the negative effects of the market turbulence as merely limited.

Since the BOJ heavily relies on the Tankan survey to make its monetary policy decisions, I think it’s safe to say that the upbeat result increases the chances that the central bank will hold off on additional quantitative easing measures in the next couple of months.

The future looks much brighter, and the BOJ does not need to act in such a hurry anymore. Heck, it might even end up revising its economic outlook to the upside in its next policy statement as recovery is being backed up by the pickup in exports due to the weak yen and the improving consumer demand.

USD/JPY: Where can it go?

USD/JPY Chart

For now, we need to closely watch how price reacts to 100.00. More than being a major behavioral level, it is also a key resistance. A break of 100.00 could result in a strong rally and a test of the pair’s former high at 103.00. However, if it holds, the bears could push the pair back down to 94.00, which is a significant support level.