BOJ June 2014 Tankan Survey

◆In the BOJ June Tankan survey of corporate sentiment, business sentiment worsened overall. Major corporations in the manufacturing industry fell below market expectations, bringing a somewhat negative tone to this report. However, this was due mainly to the reactionary decline which occurred after the increase in consumption tax, so it comes as no surprise.

◆The business conditions DI for large manufacturers fell to +12%pt in comparison to the previous report (+17%pt), and fell below market consensus (+15%pt). Performance by industry was as follows: in the materials industry, lumber & wood products took an especially big hit due to the effects of the reactionary decline after the increase in consumption tax, while ceramics, stone & clay showed a major deterioration in business sentiment as well due to the decline in housing investment. In the processing industry, domestic sales of automobiles have been in a decline as a result of the reactionary decline subsequent to raising the consumption tax, and this contributed to the deterioration of business sentiment in the industry overall. Meanwhile, general purpose machinery and production machinery, which tend to have a high business conditions DI, also deteriorated somewhat.

◆The business conditions DI for large non-manufacturing corporations was +19%pt, showing worsened conditions in comparison to the previous survey (+24%pt). Results were right in line with market consensus (+19%pt). Looking by industry, we see that retail sales suffered a major decline due to the reactionary decline after the increase in consumption tax, pulling down the overall industry along with it. However, in the household sector, the accommodations, eating and drinking services industry experienced a fairly minor deterioration in business sentiment, with personal services marking time with the services and consumer related industries maintaining a steady undertone. In other industries, the decline in housing investment saw construction and real estate worsen, while electric/gas utilities saw their business condition DI deteriorate as well, due to rising fuel prices.

◆Sales projections of large manufacturers for FY2014 see an improvement of +1.8% y/y with recurring profits seen down by -4.6% y/y. However, when we take a look at earnings projections on a half-term basis, we see that the 1^st half is expected to be down by -9.3% y/y, while the 2^nd half is seen achieving a turnaround at +0.2%.

◆The FY 2014 capex projection (incl. investment in properties but excl. that in software; all industries, large companies) was revised upwards from the previous survey to +7.4% y/y (+5.8%), exceeding market consensus (+6.0%).