BOJ September 2015 Tankan Survey

◆In the BOJ September Tankan survey of corporate sentiment, the current trend in business sentiment has worsened, especially amongst large corporations in manufacturing. Corporations have clearly become more cautious regarding the future. Fears of worldwide economic slowdown are behind this development, centering especially on China, as well as worries regarding stagnant exports and production, as well as sluggish personal consumption in addition to yen appreciation and falling stock prices.

◆The business conditions DI for large manufacturers (+12%pt in comparison with last survey’s +15%pt) worsened, while at the same time falling below market consensus (+13%pt). The business conditions DI for manufacturers worsened for the first time in three quarters. Especially notable was the worsening of business conditions DI for the export-driven processing industries due to the economic slowdown in China and the low price of natural resources.

◆Business conditions DI for large non-manufacturing industries improved (+25%pt) in comparison to the previous survey (+23%pt) and exceeded market consensus considerably at +20%pt. This represents the fourth consecutive quarter of improvement for business sentiment in the non-manufacturing industry. While domestic consumption has recently been marking time overall, inbound tourist consumption has been favorable, and this is thought to have contributed to favorable performance.

◆Sales projections of large corporations (all industries) for FY2015 grew +0.4% y/y, with recurring profits expected to be up by +4.7% y/y, reflecting the rebound from declines experienced after the increase in the consumption tax and showing a modest improvement in earnings. Recurring profits are expected to increase due to improved margins associated with price hikes and the low price of natural resources.

◆The FY 2015 capex projection for all corporations in all industries (incl. investment in properties but excl. that in software; all industries, large companies) is +6.4% y/y, an upward revision from the previous report (+3.4%). Capital expenditure plans on the September survey reflect a certain quirk in statistics whereby upward revisions tend to occur, especially for small enterprises. Upward revisions of capex projections on the current survey are considerably larger than the average year, especially for the non-manufacturing industries.

◆Market expectations are on the rise in regard to concrete policy measures such as a supplementary budget, as well as additional monetary easing by the BOJ in view of the current BOJ Tankan results and the index of industrial production announced yesterday. Our main economic scenario assumes additional monetary easing by the beginning of next year. However, there is a possibility that the market may be surprised with monetary easing measures as early as this month (October).