Japan's Tankan survey for the three months to December shows business sentiment in the manufacturing sector has improved compared with earlier in the year but remains somewhat weaker than reported in 2014 and 2015. Business sentiment in the non-manufacturing sector remains stronger but was largely changed from the previous quarter.
For manufacturers, the business conditions index rose from 6 in the three months to September to 10 in the three months to December for large enterprises, better than the consensus forecast for an increase to 7. This index ranged between 12 and 17 over 2014 and 2015. The equivalent index rose from 3 to 6 for medium-sized manufacturers and from -3 to 1 for small manufacturers. For non-manufacturers, the business condition index was steady at 18 for large firms, rose from 15 to 16 for medium-sized firms, and rose from 1 to 2 for small firms.
For all industries, large firms forecast capital expenditures in the fiscal year ending in March 2017 to increase by 5.5 percent year-on-year, down from an estimate of 6.3 percent last quarter and weaker than the consensus forecast of 6.1 percent. Manufacturers expect their capex will increase by 11.2 percent, while non-manufacturing firms forecast an increase of 2.5 percent. Medium-sized and small firms across both sectors forecast capex to fall year-on-year in the current fiscal year, resulting in an aggregate forecast for an increase of 1.8 percent year-on-year, up from an estimate of 1.3 percent last quarter.
The Tankan survey, which is conducted quarterly by the Bank of Japan, is considered the most complete reading of Japan's economic performance. The Tankan surveys individual components of the economy such as large and small manufacturing and nonmanufacturing enterprises. A key component of the survey deals with capital expenditures (CAPEX) going forward.
The Bank of Japan's Tankan survey is considered one of the most important indicators of the economy's health and helps the Bank of Japan determine monetary policy. It is widely used by investors to determine future investments in Japan. Firms are asked questions that cover a wide range of topics including the future direction of capital expenditure and pricing as well as the corporate outlook towards employment and the overall economy.
The data are broken down by large, medium and small manufacturers as well as the non-manufacturing sectors. A key number to watch is the all industries capital expenditure or CAPEX measures capital expenditure by all Japanese industries except the financial industry. The large manufacturers' index reflects the large international companies while the small manufacturers' index is reflects the domestic economy.