November 20, 2017

The Bank of Japan’s Tankan survey has indicated a further improvement in business confidence with a greater-than-expected lift in the large manufacturers index, with the overall index hitting its highest level since September 1991, according to Deutsche Bank Wealth Management.

Parts of the Tankan Index suggest an economy that is running up against capacity constraints. The sub-index on production capacity fell to its lowest level since 1991 and employment conditions also declining.

Tuan Huynh, CIO APAC and Head of WD APAC at Deutsche Bank Wealth Management, said, “The improvement in business conditions was broad-based, with service sector sentiment hitting a one-year high, construction boosted by activity in advance of the 2020 Olympics, and at an industry sector level, production machinery and electrical machinery making particularly strong gains.”

Huynh added, “However, not all indicators are so positive. The separate core machinery orders series fell by 8.1% month-on-month in September after a 3.4% rise in August. The September fall was much greater than expected, but may not signal a decline, while the consensus view remains that capital expenditure will continue to increase, tracking earnings upwards, and could also potentially be boosted by labour earnings.”

September orders were dragged down by an 11.1% month-on-month fall in orders from the service sector (principally due to lower orders for trains, computers and servers), and the series is likely to remain volatile.

Rise in Japanese equity market poses policy dilemma for BoJ

Last Wednesday, the TOPIX briefly hit its highest level since 1991 before falling back. One casualty of the Japanese stock market’s recent run has been BOJ’s exchange-traded fund (ETF) purchase program. In July 2016, the BoJ boosted its annual ETF purchase target to JPY 6 trillion, but monthly purchases have fallen sharply since August, due largely to the fact that repeated daily market gains have derailed its strategy of buying ETFs in the afternoon if the market falls in the morning.

Hunyh said, “The question now is whether the BoJ will honour its purchase target – which implies buying JPY 1.6 trillion for the remainder of the year – or whether it will quietly let it slip – which implies a de facto tapering by default. This all sits slightly Singapore November 14, 2017 Press Release 2 uneasily with the BOJ’s current professed policy stance, as revealed by the Minutes of the last monetary policy board meeting published last Thursday.”

These reveal that one member argued for the BoJ guiding the 15-year government bond yield below 0.2%, rather than targeting a zero yield for 10 year bonds. However, another board member argued against increasing stimulus, saying that it was not clear whether this would help the BoJ to reach its 2% inflation target quicker, and that “extreme steps” to do this could unsettle financial markets. The Minutes reveal that inflation was a major concern, with several board members worried that it could be depressed by lower smartphone bills and energy cost base effects.