The busy bees over in the Forex streets are once again buzzing with excitement over this red flag that pops up in Japan once every quarter. What exactly does the Tankan report tell us? Why does it have a huge impact on the yen? And does it really have to rhyme with their current Prime Minister’s name?
Well, to answer that last question, not really. Kidding aside, the Tankan is a quarterly survey conducted by the Bank of Japan to evaluate the country’s business climate. The Tankan large manufacturers’ index is probably the most important component of the report as it takes into consideration how hotshot manufacturing firms in Japan are faring. On the other hand, the non-manufacturing component of the report factors in the business conditions of the service sector.
With zero as a neutral ground, a positive reading on the index means that the optimists outnumber the pessimists, which might signal an expanding sector. Meanwhile, a negative figure means that most businessmen aren’t too giddy about the economy.
So is the report really worth a few minutes of your Wii Tennis playing time? Many market geeks think so. See, aside from the BOJ using the Tankan as basis for some of its monetary policy decisions, the Tankan index is also closely watched by investors who want to see whether Japanese companies would serve as good investments or not.
The data shows that Japanese manufacturers have been on a roll for quite some time now, showing improvement for the last six quarters, and then finally popping up to the positive level last quarter. Whew! That was a long wait since July 2008 when the data was last in the positive territory!
The Tankan readings are expected to continue their winning streak for the third quarter of this year. In particular, the manufacturing index is expected to climb from 1 to 7 while the non-manufacturing index is projected to rise from -5 to -2. If the actual figures meet expectations, this would show that business sentiment for both sectors improved during the period but that the pace of improvement was slightly slower. In fact, some analysts are saying that the Tankan results would eventually tank (pun intended) by the end of the year as negative factors weigh on Japan’s economy.
Even worse, negative factors like the rapidly rising yen and the downbeat outlook for the global economy could have already made their mark on this quarter’s Tankan survey. Looking at the charts, one would notice that the yen has kept appreciating against its counterparts since the start of the third quarter. If not for the recent BOJ currency interventions, the yen would’ve probably kept hiking up the charts like a Justin Beiber remix!
But, like I mentioned in an article a few days ago, these currency interventions aren’t enough to tame the yen and prevent it from hurting Japan’s exports. Just recently, Japan’s trade balance revealed that their surplus unexpectedly shrank by 37.5% from August last year. Ouch! Now that can’t be good for business sentiment, can it?
Of course, there are still some rays of hope. Based on the latest data, industrial production is still on a healthy climb and that capital spending is still likely to increase. On top of that, the recent interventions by the BOJ seem to have reassured some businessmen that the central bank is willing to do whatever it takes to keep Japanese industries booming. Because of all these, there still might be enough reason for businesses to be a tad more optimistic with their outlook.
But I’m sure what all you Forex traders are itching to know is what effect the results of the surveys will have on the beloved Japanese yen.
Like a geisha from 18th century, the yen has been teasing Forex traders, enticing them to buy into its lovely rallies and its safe haven status… only to get a slap in the face from the BOJ!
I think that BOJ members will be paying close attention to the results of the Tankan survey, as it could dictate what direction they should take in terms of monetary policy.
Not only has the yen benefited from mini-runs of risk aversion, but it has also gotten a boost from Japan’s (relatively) better economic performance. If the Tankan surveys were to come in strongly, it may give the yen more appeal than a Japanese pop star.
On the other hand, if the results come in poorly, it may signal that the Japanese economy is experiencing some weakness. In all honesty though, I believe that BOJ would chalk this up to the “excessive” rise of the yen, and would give them even more reason to intervene in the currency markets!
Either way, it looks like we may see a case of confirmation bias, with the bias towards finding evidence to stop this yen rally. Stay on your toes, everyone!