BoJ Tankan show corporates fine now but worried about the future

The BoJ quarterly Tankan showed corporate sentiment was stable between September and December, a somewhat firmer result than expected. The headline DI of large manufacturers' business sentiment stayed flat at 12, while the allfirms sentiment DI rose slightly from 8 to 9 with gains among small-to-medium sized non-manufacturers. Business profit expectations and capex plans were broadly revised up between September and December, showing no sign that firms have turned defensive. Record-high profit margins in 1H FY2015 appears to have bolstered corporate management's confidence. Moreover, firms see growing labor shortages, indicating that the labor market continues to tighten, consistent with the fall in the unemployment rate.

However, sentiment on the three-months-ahead outlook (i.e. for March 2016) worsened broadly across sectors and firm size. And, large firms revised down FY2015 sales plans to a decline, particularly for domestic sales of both manufacturers and nonmanufacturers. Also, manufacturers' now expect deeper output price declines than in September, while nonmanufacturers' expectations were flat at a narrow "net decline." Input cost expectations turned to a net decline among large manufacturers, and likely weighed on output price expectations. In addition, the "Inflation Outlook of Enterprises" in this survey showed that corporate inflation expectations declined further from September to December. This survey is new; it began in March 2014. Inflation expectations basically stayed flat or softened marginally softened through 2Q this year, but clearly declined from 3Q on.

Finally, large manufacturers now assume ¥119.4 for USD/JPY in FY2015 (Apr 2015-Mar 2016) and ¥118 for 2H FY2015 (Oct 2015-Mar 2016), marking a modest strengthening of the yen from the recent ¥120-121 assumption. The gap between the assumption and the current USD/JPY level implies further room for upward revision in profits, but just 1% JPY appreciation likely would push down firms' profit forecasts, which may dampen corporate confidence.