MNI DATA IMPACT: BOJ Dec Tankan: Sentiment Rises, Weaker Capex

Japanese business sentiment has improved over the last three months as exports and production have recovered with expectations of further improvement in early 2021, according to the Bank of Japan's December Tankan business sentiment survey published on Monday.

However, the level of business sentiment remains at low levels and corporates continue to have a cautious outlook view in the wake of the spread of coronavirus at home and overseas.

The improvement in sentiment among smaller firms was smaller than larger corporates, with the service sector, a large part of that group, hardest hit by the fallout from the virus.

DIFFUSION INDEXES IMPROVE

The diffusion index for sentiment among major manufacturers stood at -10 in December, up from -27 in September, registering the second consecutive rise. The index is projected to improve to -8 in March.

The Tankan diffusion index is calculated by subtracting the percentage of companies reporting deteriorating business conditions from the percentage of those reporting an improvement. A positive figure indicates the majority of firms see better business conditions.

The sentiment index for major non-manufacturers rose to -5 in December from -12, the second straight rise. The index is projected to worsen to -6 over the next three months.

The sentiment index for smaller manufactures rose to -27 in December from -44 in September, also the second straight rise. The index is expected to improve to -26 in March. The sentiment index for smaller non-manufacturers stood at -12 in December, up from -22 in September, and is projected to worsen to -20 in March.

WEAKER BIG FIRM CAPEX

The Tankan also showed capital investment plans by major firms have been revised lower, sitting below historical averages.

Business investment plans by major firms in fiscal 2020, a key to a pickup in domestic demand, are projected to fall 1.2% year on year, revised down from +1.4% in the September Tankan.

Capex plans of smaller firms are expected to fall 13.9% in fiscal 2020, revised modestly higher from -16.1% in the September Tankan.

Capex plans by major and smaller firms were both below the average of historical levels -- a closely watched BOJ metric.

HIGHER YEN FORECASTS

The average dollar/yen exchange rate assumed by major manufacturers for fiscal 2020 was JPY106.79, compared with JPY107.34 in the September Tankan, while the average euro/yen exchange rate was JPY121.04, compared with JPY120.42.