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Sunrise soon in Japan with policy actions

Japan business sentiment short term survey: a fatal blow to the equity market ?

The Bank of Japan released its short term economic survey (a.k.a. Tankan survey) last week. The outcome fell short of market expectations with the Nikkei falling 3.55% on the same day. Business conditions fell for the current Diffusion Index from 9 to 7 (back to March and June level last year) for all types of companies. By sectors, there is strong downside in communication firms are suffering with difficulties in selling smartphone, a reduction in communication fees. Machinery and electrical machinery are impacted by the economic slump in emerging market and oil producing countries. Conversely, companies in the real estate sector are benefiting from negative rate, rise in rent and drop in vacancy rate. The future Diffusion Index fell further, wiping off the entire improvement coming from Abenomics and implying companies are expecting their environment to deteriorate in the coming months impacted by sluggish inflation expectations. However, headline tankan DIs mirror foggy uncertainties and are inconsistent with solid capital spending plan. Concerns over a sharp reduction in capital formation plans for fiscal year 2015 (ending march 2016) was relaxed as it stayed resilient and well above past years average at +9.8% year on year for all types of companies. Guidance for fiscal year 2016 is somewhat sluggish, especially in the second half of the fiscal year (September to March 2017). However, the plan is inclined to augment in the following surveys.

Japanese authorities will not stand by and watch 

Nevertheless, the release calls for leaders actions to overcome the downbeat. Considering the fact that the BoJ and the government will act in concert, the schedule is tight for the Bank of Japan. Going forward, first quarter GDP will be weak according to consumer spending and corporate production data during the first two months of the year which can push the BoJ to expand its quantitative easing in April or to wait for the outcome and give a boost in June. There will be two meetings (April 27-28th and June 15-16th) before the upper house election around the end of July 2016 and expectations for the BoJ action are growing due to the recent appreciation of the yen implying more volatility around the April meeting.  We should witness a negative reaction from the market if the BoJ does not implement new measures in April but this will increase significantly chances for June meeting inciting equity investors to take greater exposure. For its part, the government will announce its clearer intention whether the consumption tax will be raised in April 2017 as scheduled. The decision will be made around the G7 summit hosted by Japan on May 26-27th. Simultaneously, the government is expected to announce an economic stimulus package to revitalize the economy through structural reforms. In our main scenario, there is little room left for monetary policy to boost the economy and less chance for further rate cut. In this regard, fiscal stimulus combined with delaying consumption tax hike is critical. But despite extensive fiscal stimulus measures would be carried out, it could take time to filter through the economy. Hence, the government decided to boost contract rate of public spending for the first half of the fiscal year



DELAL Mahfoud , Strategy and Economic Research Department at Amundi Japan
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Sunrise soon in Japan with policy actions
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