Thursday, 20 September 2018

Tankan tells us a resizing of expectations is in order

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Anthony Peters, SwissInvest Strategist

This morning I strode into the office with intent as it is that one day a quarter when Japan takes centre stage as the Bank of Japan’s quarterly Tankan Survey has been released. I suppose it would have been an act of blind optimism to expect anything particularly positive to jump out of the report, but in fact, it looked a lot more gloomy than had been expected.

I seem to sit down once a quarter, plough through the numbers, and look for the positives which the headline writers have missed in their race to make Japan look worse than it actually is. For most of this year I have been able to hide behind the extraordinary effects of the earthquake and tsunami which hit the country in March. However, looking through the report this morning floors me in my search of good news.

The Tankan is a diffusion index and therefore all you have to do is to add up the minus signs to work out whether overall sentiment is positive or negative. However, although the actuals are still broadly negative, they are on the whole better than the results for September and in many cases also better than the forecasts which were posted in September for December.

That has me looking at the horrific forecasts posted today for March 2012 and makes me wonder whether the level of doom and gloom might be predominantly in the mind. Please don’t get me wrong; I’m not trying to say that the Japanese economy is looking rosy, but I do suspect that the level of future pessimism being expressed is higher than will turn out to be the truth.

Like so many globally important business indicators of late, the political and economic macro game in Europe swamps them [Tankans] – the debt crisis is the second earthquake and tsunami of the year

The big outlier is the top number which folks who have never actually studied the full Tankan love to look at, namely the confidence of large manufacturers. It was there that optimism had been highest, not least of all as the rebound effect after the earthquake was expected to be highest there. However, the eurozone crisis and the concomitant weakness of the euro and the dollar vis-a-vis the yen stopped that in its tracks. Hence, when looking at the details of the report, one finds that sectors which supply the bid exporters are feeling battered and bruised whereas sectors which would be expected to be driven by domestic demand appear much less negative.

There is, though, one huge difference between this quarter’s Tankan and the ones in the past – as a European it now appears to have sod-all effect on me. Like so many globally important business indicators of late, the political and economic macro game in Europe swamps them – the debt crisis is the second earthquake and tsunami of the year. Nevertheless, the report cannot be deemed to be unaffected by the eurozone issues.

Turning to China

Japan now relies increasingly on China which in turn still draws most of its growth from exports to the West and there is no doubt that the sharp slowdown in demand here has not gone unnoticed. Now it gets complicated. China’s level of economic optimism is reflected in its own construction boom – or bubble, if you prefer. The key driver in Chinese infrastructure spending is not whether the economy is growing at 10% or at 8% or at 6% but that it is not decelerating and if so, at what rate. Chinese construction has been the world’s biggest single driver of growth and were this to start losing its lustre, there isn’t a lot left.

There is no doubt that Indian growth and expansion is now looking more fragile and if the two manufacturing BRICs are vulnerable, then the two commodity BRICs won’t be too far behind. The theme which I had thought would be the one for 2011 could well become the one for 2012 too, namely the resizing of the global economy. There is no reason for markets to go into meltdown as this occurs – there will still be plenty going on; it is simply a question of a concomitant resizing of expectations. That is what the Tankan is telling us.

Meanwhile, the euro dropped through US$1.30 yesterday. I was talking to a rates customer in the US just as it happened. To add some spice, we took a bet as to whether it would close above US$1.30 at the end of the day or not. He said no, so I took the yes – more out of sport than out of conviction. It has bounced either side of that level several times in the period since and seeing as that we didn’t agree on the close where, I’d be prepared to call it a draw.

The problem will continue to be that until the eurozone crisis is resolved – and resolved it will be, albeit that we don’t yet know how – we don’t know what the euro is or will be. Will it remain with all 13 members? Will it be a smaller group or will it not be at all? If I knew the answer, I’d be queueing up to collect the Wolfson Prize. In the meantime, the best one can do is to remain index neutral – what a horrid thought.

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