MNI DATA IMPACT: BOJ Mar Tankan: Sentiment Up, Stronger Capex

Japan's major measure of business sentiment improved from three months ago due to the recovery of exports and production, but businesses maintain their cautious view for the three months' ahead, according to the Bank of Japan's March Tankan survey published on Thursday.

The survey showed that business sentiment among major manufacturers recovered to pre-coronavirus levels, but other business sentiment levels remained low.

Compared with manufacturers, business sentiment among non-manufacturers remains severe, with the service sector, a large part of that group, hardest hit by the state of emergency.

DIFFUSION INDEXES IMPROVE

The diffusion index for sentiment among major manufacturers stood at +5 in March, up from -10 in December, registering the third straight rise, although the median forecast was for +1. The index is projected to improve to +4 in June.

March's +5 is the highest level since September 2019 when it was at +5, before Covid-19.

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 -1 in March from -5, the third straight rise. The index is projected to be unchanged at -1 three months ahead.

The sentiment index for smaller manufacturers rose to -13 in March from -27 in December, also the third straight rise. The index is expected to improve to -12 in June. The sentiment index for smaller non-manufacturers stood at -11 in March, up from -12 in December, and is projected to worsen to -16 in June.

STRONGER CAPEX PLANS

The Tankan also showed capital investment plans by both major and smaller firms this fiscal year were above the average for historical data.

But there are reservations about capex plans in every March Tankan as businesses refrain from strictly predicting capex plans before the end of the fiscal year.

Bank officials are focused on revised capex plans in the June Tankan to gauge an economic recovery mechanism.

Business investment plans by major firms in fiscal 2021, key to a pickup in domestic demand, are projected to rise 3.0% on year, compared with -3.8% in fiscal 2020, while capex plans of smaller firms are expected to fall 5.5% in fiscal 2021, compared with -11.1% last fiscal year.

The average dollar/yen exchange rate assumed by major manufacturers this fiscal year was JPY106.07, compared with JPY106.66 in fiscal 2020, while the average euro/yen exchange rate was JPY123.10, compared with JPY121.76 last fiscal year.