Tankan Time!

Both the manufacturing and non-manufacturing components of the Tankan index are expected to post huge improvements for the second quarter of 2010. The manufacturing index is expected to leap from -14 to -3 while the non-manufacturing index is estimated to rise from -14 to -8 during the period. Since both readings are slated to remain in the negative zone, those could still reflect worsening business conditions.

Let’s take a look at the recent data to find out if they support those expectations.

The BSI manufacturing index released mid-June showed that manufacturers believed that business conditions were better during the second quarter as the index jumped from 4.3 to 10.0. This could mean that they stepped up their production, hiring, and investment then. Aside from that, the recent industry activity indices posted strong rebounds in April, suggesting that businesses could continue to pick up.

However, Japan’s latest trade figures hint that a slight downturn in manufacturing could be seen. Annual export growth slowed for the third consecutive time in May, weighed down by lower demand from its trade partners. This slump in demand for Japanese products could translate to a slowdown in production by Japanese firms.

What does this mean for the yen?

If you ask me, I don’t believe the Tankan surveys will have too much effect on the yen. Normally, good results from the surveys would lead to a yen rally. This makes sense, as good economic performance typically leads to a stronger currency. But these aren’t normal times.

The main driver in the market right now is risk sentiment, with risk aversion being the dominant market theme. The yen has been plowing away the past couple of weeks as investors have unwound their positions in risk-heavy assets. As long as this continues, yen bulls could continue to celebrate with a shot of sake in each hand!

I also think that any bullishness for the yen caused by good results from the Tankan reports will be tempered because of the prospect of intervention by the Bank of Japan. Remember, Mr. Kan is in charge right now and, in the past, he’s been a strong supporter of a weaker yen in order to boost exports. Should we see the yen continue its amazing run, I’m willing to bet my collection of Naruto comics that we’ll hear some type of jawboning by BOJ officials in the near future.