BoJ Tankan Worsens – Deutsche Bank
Taisuke Tanaka, Strategist at Deutsche Bank, suggests that the downward risk to USD/JPY is greater under worsening Japan-US economic conditions.
Key Quotes
“The March Tankan survey's business conditions DI for large manufacturers came in at 6, below 12 in the previous (December) survey, and the outlook DI over the next three months declined further to 3. The business conditions DI for large non-manufacturers was 22, compared with 25 previously, and the outlook DI over the next three months weakened to 17.
The historical pattern is that deteriorating economic conditions in Japan indicated in the Tankan tend to reflect a worsening US economy, and a weakening USD and strengthening JPY tend to spur declines for Japanese equities. In this sense, US economic trends are the key for strong-JPY risk, but a deteriorating domestic economy is also recognized as a bull factor for the JPY.
The USD/JPY rate that large manufacturers assume for their FY2016 business plans is 117.45 (117.45 for 1H, 117.46 for 2H). With the market having already fallen to around 112.5, this assumption looks rather generous. However, the response average for this category is simply the USD/JPY's average level over the last several months. This figure should thus not be used to emphasize implications for the market, for example as their currency break-even point.
The response period for this Tankan survey was 25 February to 31 March, so it strongly reflected the risk-off in January and February. While market sentiment recently settled slightly, it is difficult to see fundamentals suddenly reverting to a recovery path. In conditions of lingering concern about risk-averse sentiment, we think the USD/JPY will likely face downside risk to below 110 for the foreseeable future.”
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