BoJ slow in downgrading its assessment on economy

The latest Q3 BoJ Tankan survey showed that the current business conditions DI for large manufacturers fell mainly because of weak exports to China and ASEAN economies despite a firm economic recovery in the US. The Q4 outlook DI for large manufacturers fell further, indicating that business conditions are likely to weaken more, states Societe Generale.

With regards to large non-manufacturers, the current DI for Q3 unexpectedly improved, but the Q4 outlook DI for large non-manufacturers shows a significant deterioration. Thus, the latest Tankan survey confirmed that both manufacturers and non-manufacturers are cautious about the business outlook.

In addition, production and export data are also weakening. August production data were weak, showing a second consecutive month of decline mainly due to the unstable export environment, especially to emerging economies including China. As a result, the government revised down its overall assessment on production, explaining that "Industrial Production has weakened", as opposed to "Industrial Production fluctuates indecisively" in the previous assessment. This implies that production is now weakening as a trend. 

After seeing the weak August production data, the BoJ could revise down this assessment in the 7 October policy meeting, probably to match with the assessment from October 2014 when it implemented additional QQE measures. Against this backdrop, there is an increased possibility that the BoJ may implement additional QQE measures at its following meeting on 30 October, added SocGen.