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Tomorrow, we’ll be seeing the results of the Tankan survey for the first quarter of 2010. Did Japan’s manufacturing and non-manufacturing industries improve? Or have business conditions worsened? In any case, before going on to the nitty-gritty of the upcoming Tankan surveys, let me first explain the way of the Tankan.

The Tankan index is a survey designed to see whether the business conditions in Japan are improving or not through a boom/bust scale. A positive reading means the industries are experiencing growth, while a negative reading signals contraction. Currency traders keep a close watch on the report because it comes out only four times a year. Also, you should know that the Bank of Japan monitors the surveys closely and uses their results to help determine monetary policy.

Both the manufacturing and non-manufacturing components of Japan’s Tankan survey are expected to inch higher during the first quarter of this year. The manufacturing index is projected to leap from -24 to -14 while the non-manufacturing index is estimated to climb from -22 to -17. Still, since both figures are slated to remain in the negative territory, the upcoming Tankan results could reflect worsening business conditions in Japan.

Let’s review the latest economic figures from Japan and figure out whether the recent reports support the forecast… First, Japan’s industrial production still seems to be struggling as it dipped by 0.9% in February after surging by 2.7% in January. Next, the BSI manufacturing index, which was released a couple of weeks ago, surprisingly fell from 13.2 to 4.3 for the first quarter. Deteriorating business sentiment could imply that manufacturing firms scrimped on spending, investment, and hiring during the period. Uh oh…

On a lighter note, their tertiary activity index chalked up a strong 2.9% increase during the first month of 2010, hinting at a probable improvement in the non-manufacturing index for the first quarter. Components of the report showed that communications, retailing, and utilities posted huge increases in January and could continue to do so in the following months.

Presently, the USDJPY is trading just above 92.00 and better than expected Tankan figures could send the USDJPY pair back down to 91.00 mark. Recall that last December 13, both Tankan surveys logged an uptick over the market’s consensus. And guess what? The yen got some broad-based support shortly after the numbers were published. Back in September 30, only the non-manufacturing index came in better while the manufacturing version of the account came in worse. Still, the market saw this favorably and pushed the yen higher.

If both surveys register a weak tally, the yen may extend its recent slide, sending the USDJPY pair above 93.00. Furthermore, weak business conditions could give the BOJ more motive to talk down the yen. As I pointed out in one of my posts last week, the BOJ has been wanting the yen to weaken in order to boost exports.

Another factor to keep in mind is what is happening in China. The Chinese government has made moves in order to ease inflationary pressures and curb their growth. Falling Chinese demand could also hurt the Japanese export industries down the line.

With Chinese demand potentially taking a hit and a poor business outlook looming, what will the Japanese government do now? It looks like Japan has another set of headaches to deal with! Asperin, anyone?