Analysis from Nikko Asset Management Chief Global Strategist, Naomi Fink
Overall, the Tankan showed that sentiment remains firm among corporates, with robust profitability, capital expenditure. Plans to continue fixed investment, particularly R&D and software, in FY2024 provided reinforcement to the view that corporate sentiment remains a strong contributor to the “virtuous circle” of growth necessary for the BOJ to continue removing accommodation. Changes in output prices are foreseen by corporates as rising, and importantly, improving with respect to input prices, which are foreseen as rising at a comparatively subdued pace going forward (which bodes well for improvement in corporate profit margins). Moreover, ease of finding skilled labor continues on a downtrend for all sectors, demonstrating that chronic labor shortages that particularly afflict labor-intensive industries such as services. Given most corporates still perceived financial conditions as accommodative, the indication for the BOJ is that it might afford to remove additional accommodation without too greatly damaging sentiment. But the survey also told the tale of two-speed corporate sentiment, with non-manufacturer sentiment much more nuanced than sentiment among large manufacturers, which saw a greater-than-expected improvement.
Buoyant sentiment in Manufacturing, not only dependent on JPY weakness
Manufacturing sentiment, at 13, improved from 11 in March, and continued to capitalize on the shallow trough reached in 2023. Improvements were widespread across the majority of manufacturing industries. The outlook remained positive, though examining the breakdown among corporates of forecast survey conditions, the majority of manufacturing and non-manufacturing sectors saw conditions neither as “favorable” nor “unfavorable”. Large manufacturers undoubtedly benefited from the weaker yen, which surpassed their FY2023 end forecasts of 141.29 (USDJPY) by a significant margin. Still, their outlook was not dependent on expectations for ongoing yen weakness, as large manufacturers’ FY24 end outlook sits at 142.68, even lower than the overall average of 144.77 for all firms.
Non-manufacturing: peaking sentiment, slower price rises, tight labor
Non-manufacturing sentiment had been improving for some time (since its plunge in 2020) and now appears to be leveling off. One key sector that showed a decline in sentiment was among firms providing services for individuals (a key proxy of ability of households to accept price rises likely to keep the virtuous wage-price circle going). That said, one bright spot was the signal of a stabilizing outlook among large domestic individual-oriented service firms, with no additional deterioration foreseen going forward. This could be due to expectations for real wage growth among households, which may allow households to absorb price increases. That said, many large manufacturing and non-manufacturing firms are foreseeing subdued medium to long term inflation (3-5 years ahead), lower than the BOJ target of 2.0, which may reinforce the BOJ’s very gradual pace of removal of existing accommodation. Meanwhile however, the ongoing labor shortage continues to reinforce the need for ongoing fixed investment not exclusive to but concentrated in large firms; it is possible that the ability of large firms to keep costs subdued relies on these productivity-enhancing investments.
No hurdle to withdrawing accommodation, but household data still needs to improve
On its own, the Tankan data present no immediate barrier to withdrawal of further accommodation from the BOJ. Nonetheless, peaking sentiment in the non-manufacturing sector indicates that domestic data will bear continued scrutiny. Signals that households may be tolerant of higher prices in domestic services (which may allow labor-intensive firms to pass through their higher wage costs) would give a clearer “green light” for rate hikes. Upcoming May household spending and labor cash earnings as well as June core inflation data (and within this, the balance between goods and services prices) are all releases that should be examined for signals of improving household tolerance to absorb more widespread price rises.
