BoJ Tankan reports deterioration in conditions

Chris Scicluna
Emily Nicol

BoJ Tankan reports deterioration in conditions amid significantly higher cost pressures; firms’ inflation expectations revised up over coming years, but still expected to fall short of BoJ’s target over the medium term
The BoJ’s comprehensive Tankan survey offered a predictably more downbeat assessment of Japanese business conditions in the first half of the year, as the impact of the latest pandemic wave and Ukraine war – and the associated surge in cost pressures – took their toll. Admittedly, the decline in the headline manufacturing diffusion index (DI) for large manufacturers in Q1 was softer than had been expected, down just 3pts to 14, nevertheless a three-quarter low. But not least reflecting a more marked deterioration in firms reliant on energy and commodity inputs – e.g. the DIs for petroleum and iron/steel manufacturers were predicted to decline 20pts to +7 and -10 respectively, with the chemicals DI forecast to drop 12pts to +16 – the headline manufacturing DI was forecast to fall a further 5pts to 9 in Q2, albeit remaining well above the lows at the onset of the pandemic (-34).

The deterioration among non-manufacturers was less marked, with the equivalent DI for large firms down just 1pt in Q1 to +9, still the second-strongest reading since Q419. Unsurprisingly given the surge in Covid cases, the hit to hospitality last quarter was greater, with the respective DI for large firms down 5pts to -56, with more striking declines (20pts) for SMEs in that sub-sector. But with restrictions having been lifted, firms of all sizes in hospitality expected a marked improvement this quarter. However, given an anticipated deterioration in wholesale market conditions, the headline non-manufacturing DI was forecast to fall a further 2pts to +7 in Q2.

While firms remained relatively upbeat about their sales projections, forecasting growth of 2.1%Y/Y this fiscal year, this would be half the pace recorded last year. Firms were also pretty cautious in their capex intentions for the year ahead, forecasting growth of 1.0%Y/Y, perhaps inevitably so given the significant economic uncertainties ahead. For example, firms expect profits to fall back this year, with the weakness reflecting a more notable decline among manufacturers in the face of significantly higher cost pressures. The input cost DI for large manufactures rose 9pts to +58 in Q1, the highest since Q208. And so, the net share of those firms reporting higher selling prices as a result rose sharply too, with the associated DI up 8pts to +24, the highest since Q280. The respective DI for large non-manufacturers also rose to its highest since the start of 1991.

Notably perhaps, in aggregate, firms forecast an increase of 2.1% in their output prices over the coming 12 months, up from 1.2% from three months ago. But they also expect a cumulative increase of 3.2% in their output prices over the entire five-year forecast horizon (although that’s still up 0.9ppt from the prior survey). Price expectations of large manufacturers were, however, considerably lower, with those firms forecasting a cumulative increase of just 1.7% over the coming five years.

Regarding general consumer prices, the BoJ might be encouraged to see to see that firms now expect inflation to be running at 1.8%%Y/Y in one year’s time, an increase of 0.7ppt from the prior survey. This notwithstanding, they also expect inflation to moderate to 1.6%Y/Y in three years’ time and be no higher than that in five years’ time. That’s a modest improvement from the December survey, but nevertheless still some way below the BoJ’s 2% inflation target. And so, it still suggests that the BoJ will maintain its current policy stance though to the end of Kuroda’s term as Governor in April 2023.

Euro area inflation set to jump to a new high of about 7% led principally by energy and food; but core inflation likely to rise above 3% too; final manufacturing PMIs and car registration data also due
Following the largely stronger-than-expected national inflation data of the past couple of days – with the EU-harmonised measure up to 7.6%Y/Y in Germany, above 5%Y/Y in France, above 7%Y/Y in Italy and almost 10%Y/Y in Spain – today will bring the euro area’s flash HICP estimates. We expect higher energy prices to continue to exert upward pressure on the euro area headline inflation rate, which we forecast to rise 1.1ppt to a new series high of 7.0%Y/Y, above the consensus and firmly above the ECB’s revised baseline scenario of inflation, which suggested quarterly peaks of 5.4%Y/Y in Q1 and Q2. We also expect rising goods and services inflation to push the core CPI rate up above 3.0%Y/Y.

In addition, today will also bring the final manufacturing PMIs for the euro area, Germany and France and UK, as well as initial results for Italy and Spain, which will also suggest a slowing of economic activity at the end of Q1. The flash euro area PMIs saw the manufacturing output index decline 1.9pts to 53.6, a five-month low restrained by supply-chain disruption and cost pressure. Finally, March new car registrations data from Italy and Spain are likely to highlight the impact of ongoing supply-chain disruption – this morning’s figures from the PFA reported a drop in French new car registrations of 19.5%Y/Y to 147.1k, which meant that sales were some 35% below the March level in 2019 ahead of the pandemic.

US labour market report should report ongoing firm growth in payrolls; ISM manufacturing and construction spending data also to come
It’s set to be a busy end to the week for US data with the March labour market report centre-stage. Close to the consensus, Daiwa America’s Mike Moran forecasts another strong report, with nonfarm payrolls up another 500k following the upside surprise of 678k in February. While that might normally be expected to push the unemployment rate lower, an increase in the labour force could keep it steady at 3.8%. But having surprisingly dropped to zero on a month-on-month basis in February, wage growth is expected to rebound. Beyond the labour market report, the ISM manufacturing survey is likely to point to ongoing expansion in the sector despite the headwinds from supply-chain disruptions and the pandemic. However, Mike expects the production and orders components to cool somewhat. Finally, in light of the recent strong showing for housing starts, construction spending data for February should maintain their uptrend with growth close to 1%M/M. 

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