BOJ December 2014 Tankan Survey

◆In the BOJ December Tankan survey of corporate sentiment, the current trend in business sentiment was marking time, reconfirming business conditions since the last report. Corporations of all sizes reported forecasts worsening, and all reported being cautious as regards the future business environment.

◆The business conditions DI for large manufacturers (+12%pt) worsened in comparison to the previous report (+13%pt), and fell slightly below market consensus (+13%pt). The cheap yen and high stock prices have persisted since the end of October when the BOJ announced its decision to expand both qualitative and quantitative monetary easing measures. It had been hoped that this would push up the business conditions DI for large corporations (especially in processing), but the effect was fairly limited. In the processing industries, the business conditions DI of production machinery continues to be firm with the help of firm capital investment related demand overseas as well as the weak yen.

◆Business conditions DI for large non-manufacturing industries improved by +16%pt in comparison to the previous survey (+13%pt) and exceeded market consensus (+13%pt). In performance by industry, we see an improvement in business conditions for the real estate and construction industries due to the comeback in housing starts which had experienced a low after the increase in consumption tax. Meanwhile, accommodations, eating & drinking services improved for the first time in three quarters supported by the increase in foreign tourists and business travel to Japan.

◆Sales projections of large corporations for FY2014 see an improvement of +2.0% y/y (+1.8% on the previous survey), a small upward revision from the last survey. Revenues are expected to increase for the fifth year in a row. Major corporations in all industries see FY2014 recurring profits up by +1.6% y/y (-3.0% on the last survey), the third consecutive year of earnings growth. The originally expected decline in recurring profit was primarily because of the reaction to last year’s major gains. For this reason a minor decline in earnings was expected. But in the end, the corporate earnings environment had a much stronger undertone than was expected.

◆The FY 2014 capex projection (incl. investment in properties but excl. that in software; all industries, large companies) is +8.9% y/y, and exceeds market consensus (+8.1%). According to GDP statistics, real capex investment has decline for two consecutive quarters, but according to the results of the BOJ Tankan, corporations continue to have a positive view of capex investment.