Tankan (Q3)

Business conditions prove resilient According to today’s Tankan survey, business conditions held up better last quarter than most had anticipated but the further deterioration in firms’ capital spending plans will cause some concern at the Bank of Japan. The decline in the Tankan’s headline index of business conditions for large manufacturers, from 7 in Q2 to 5 in Q3, was far less pronounced than most had anticipated. Reuters’ monthly Tankan turned negative last quarter and the Bloomberg median foresaw a fall in the official Tankan to +1. Conditions in non-manufacturing also held up better than expected, weakening from 23 to 21. Bank of Japan Governor Kuroda indicated last week that the Bank expects domestic demand to remain firm as long as companies continue to invest. As such, the fall in firms’ capital spending plans for the fiscal year that ends in March from +7.4% to 6.6% is a little worrying. All told though, conditions are still a bit better than in 2016, when the Bank of Japan conducted a comprehensive review that ended with the introduction of Yield Curve Control. Back then, the Bank didn’t cut its short-term policy rate. And given that the Bank’s concerns about the impact of looser policy on the health of banks have risen since then as their capital ratios have kept falling, today’s figures don’t present a clear-cut case for lowering the short-term policy rate any further. Marcel Thieliant Senior Japan Economist +65 6595 1514 marcel.thieliant@capitaleconomics.com