Economy

Japan Tankan for June shows big manufacturers' sentiment at three-year high

Key Points
  • Japan's Tankan report showed the Big Manufacturers Index for June came in higher than expected at +17, compared with a Reuters poll forecast for +15.
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Japan's Tankan report showed big manufacturers' sentiment beat expectations, with the index hitting a three-year high.

The Big Manufacturers Index for June came in higher than expected at +17, compared with a Reuters poll forecast for +15. That was up from +12 in the March survey.

The Big Manufacturers Index was expected to come in at +15 for September, above a Reuters forecast for +14.

The closely watched index, which can affect policy making, is a quarterly survey of Japanese businesses.

The dollar/yen spiked as high as 112.38 after the data, before retreating to 112.27 at 8:26 a.m. HK/SIN. It was at 112.26 just before the release.

Kathy Matsui, chief Japan strategist at Goldman Sachs Japan, noted that the survey offered a very "real-time" read of corporate sentiment, which was running positively.

"The yen-dollar rate has been pretty stable over the last couple of months and generally speaking corporate profits are still running at record levels. So I think it's pretty much a feel good environment is what we're detecting in this latest read," she told CNBC's "Squawk Box" on Monday.

But she pointed to capital-expenditure plans as the item to watch ahead.

"We need to see if the capex plans — which typically are very strong in June, but end up being subsequently being revised downward, if those plans are actually going to hold up — because I think this is a pretty big focus in the market," she said. "We are pretty optimistic that the capex plans are going to hold up, but the track record would suggest that's not always the case."

Among other readings in the survey, the Small Manufacturers Index for June came in at +7, in line with expectations from a Reuters poll, while it was expected to come in at +6 for September, above a Reuters forecast for +2.

The June Big Non-Manufacturers Index came in at +23, in line with expectations.

Japan's big manufacturers expected the dollar to average at 108.31 yen for the 2017-18 fiscal year, compared with 108.43 in the March survey.

Others also were positive on the survey.

"The breakdown of the survey showed gains for firms across all sizes, and in service sector firms as well as manufacturers," said Rob Carnell, head of research for Asia at ING, in a note on Monday. "But it was manufacturers and in particular, large manufacturers, that showed the most pronounced gains. And this suggests that external trade is the prime driver for the gains.

Japan's trade balance, has been pushing erratically into positive ground in recent quarters and will likely nose further into surplus over the rest of the year."

Carnell added that the results would add to pressure on the Bank of Japan to consider amending its current quantitatve easing (QE) strategy targeting a zero yield on the 10-year Japanese government bond (JGB).

Carnell noted that the Tankan can offer a more reliable gauge of Japan's economy than its volatile gross domestic product (GDP) figures.

For the first quarter, Japan's GDP grew 0.3 percent on-quarter and 1.0 percent on-year, weaker than the 0.6 percent and 2.4 percent expected, respectively.

The BOJ raised its economic assessment. It increased its real gross domestic product (GDP) growth forecast for the 2017-18 fiscal year to 1.6 percent from the 1.5 percent projected in January. But it lowered its core consumer price index (CPI) growth forecast to 1.4 percent from 1.5 percent in the same period.

The BOJ has taken essentially a "whatever it takes" stance on boosting inflation, saying it would maintain an easy stance until inflation exceeded its target of 2 percent "in a stable manner."

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