BoJ’s Tankan survey hints weaken business conditions in Q3

Due to fall in exports to China and ASEAN economies despite a firm economic recovery in the US caused the current business condition diffusion index (DI) for large manufacturers to slowdown. Japan's real GDP growth turned negative in Q2. The current business condition diffusion index (DI) for large manufacturers is likely to fall to +12 in Q3 from +15 in Q2, said Societe Generale. 

As the yen has depreciated further than this prediction and oil prices have decreased, resulting in a rapid improvement in terms of trade, corporate profit has been expanding strongly. Nominal GDP growth, which is more important for companies, has expanded at an annualised rate of around 9% in Q1, followed by further positive growth in Q2. The average of predicted FX rates by large manufacturers in the Q2 Tankan survey indicated a USD/JPY 115.65 exchange rate for H2 FY15, notes SocGen.

Considering that the expansion of corporate profit is fairly strong, business sentiment should probably remain firm. In Q4, the DI outlook for large  manufacturers is likely to remain unchanged at +12. 

"A steady recovery trend in exports, especially in the US where recovery in consumption is evident. Moreover, the government and the BoJ are likely to maintain their commitment to completely exiting deflation and to take measures to avoid an economic downturn", added SocGen.