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Along the same lines the Bank of Japan’s (BoJ) new old monetary policy, which will concentrate on controlling the yield curve, and would not have an effect on the Japanese inflation rate.
On the contrary, the data is likely to look quite ugly again. That further supports the critics in Japan.
Until now we have focused on the corporate savings rate to measure the strength of corporate activity in Japan.
The three arrows of Abenomics (fiscal stimulus, monetary easing, and structural reforms) aim to discourage corporate deleveraging and restore corporate activity, then to use that power to pull Japan completely out of a state of weak domestic demand and deflation.
In other words, the aim is to reduce the corporate savings rate and push it into negative territory.
The increase in the corporate savings rate, this time, is likely due to uncertainties in the global economy, the significant improvement in terms of trade and the inability of firms to invest/use all their increased cash holdings. The increase is not likely a start of a new phase of deleveraging and restructuring among firms. Going forward, policy actions should have a positive effect and will likely put the corporate savings rate back on a declining trend.
Another indicator to measure whether firms have restarted deleveraging and restructuring activities is the BoJ Tankan survey, the next update of which is to be released on 3 October.
We expect the BoJ Tankan survey to further confirm that firms have not started restructuring and deleveraging, which means that corporate activity will likely recover as uncertainties in the global economy and markets recede and as domestic demand improves due to policy action by the government and the BoJ.
This, in turn, should lead to Japan to completely exit from deflation and structurally weak domestic demand.
Another indicator used to determine whether firms have restarted deleveraging and restructuring activities is the BoJ Tankan survey, the next update of which is to be released on 3 October. The large manufacturer current business condition diffusion index (DI) is likely to rise to +7 in Q3’16, compared with +6 for two consecutive quarters in Q1’16 and 2Q16.
The decline in the manufacturer business DI from +15 in Q2’15 has likely bottomed out. This supports the argument that industrial production and exports have likely also avoided a further fall, and have started showing some movement toward a recovery after temporarily stagnating.
The USDJPY remains much stronger than the 111 JPY/USD level corporates had anticipated for H2’16, but they will likely judge the risk of USDJPY falling well below the 100 level to have decreased. The outlook DI for Q4 will likely be at +8, indicating that the recovery should continue.
