Japan's Tankan Slips and the Outlook Weakens

Japan’s Tankan in the third quarter slipped to +8 from a reading of +9 in the second quarter. The headline most closely followed by Japanese investors and economists is the reading for large manufacturing firms. That index had previously slipped from 14 in the first quarter of 2022 to +9 in the second quarter; the third quarter extends this trend slippage that dates to peak readings of +18 in the third and fourth quarters of 2021. On data back to 2004, the manufacturing reading for the third quarter has a 48.5-percentile standing, putting it just below its median on that timeline.

By comparison, the nonmanufacturing reading rose to 14 in the third quarter from 13 in the second quarter; it had been as low as +9 in the first quarter of 2022, the same level as in the fourth quarter of 2021. The nonmanufacturing trend has been on an improving run while manufacturing has been under deteriorating run in Japan. The nonmanufacturing sector has a 51.5 percentile standing on data back to 2004, slightly above its historic median.

Looking across sectors in the report the nonmanufacturing area shows some significant industry improvements. Within nonmanufacturing, in construction and real estate there are monthly improvements. Improvement in wholesaling is modest on the month. There is substantial improvement in transportation, a slight improvement in services for businesses and a slight improvement in restaurants & hotels that still have a net negative reading but showed less of a negative reading in the third quarter. Deteriorating sharply quarter-to-quarter were personal services that fell from a +18 in Q2 to a +2 reading in Q3; however, that had been a negative reading in the previous two quarters (Q4 2021 and Q1 2022). Also weakening in the quarter is retailing; that industry fell to a reading of +3 in Q3 from +7 in Q2: it had only been at +2 in the first quarter and was at +3 in Q4 2021, so this is a return to retailing roots around the turn of the year.

On the positive side, construction and real estate both have 51.5 percentile standings over this period. Transportation has a 60.6 percentile standing; services for businesses have a 78.8 percentile standing, with wholesaling at an 87.9 percentile standing. Below median readings exist in retailing, restaurants & hotels, and personal services.

Medium-sized enterprises The Tankan also extends to smaller companies although these readings are not considered to be critical as bellwethers in this survey. However, for medium-sized manufacturing firms the Tankan in the third quarter was zero, the same as in the second quarter, down from stronger first quarter and fourth quarter readings. At the zero-percentile mark, the medium firm manufacturing standing is at the 33.8 percentile mark. Nonmanufacturing, however, has been improving for medium sized companies, moving up to a +7 reading in the third quarter from +6 in the second quarter and zero in the first quarter of 2022. Nonmanufacturing has a 60.8 percentile standing. The outlook for manufacturing for medium-sized companies slipped to -4 in Q4 2022 from -3 in Q3; that compares to a +1 reading in Q2. The standing for this reading is in its 33rd percentile- a weak reading in historic context. Nonmanufacturing showed an improvement in the outlook to +2 in Q4 from +1 in Q3 compared to -3 in Q2; it has an above median, 53.3 percentile standing.

Small enterprises Small enterprises also are surveyed. Small manufacturing firms registered another -4 net Tankan reading in Q3 2022, for the third quarter in a row. Their standing is in their 46.7 percentile of their historic queue of data. Nonmanufacturing for small enterprises improved to +2 in Q3 from -1 in Q2 and -6 in Q1. Nonmanufacturing has a queue standing that is firm at the 73.3 percentile mark. The outlook for manufacturing stayed at -5 for small manufacturing enterprises in Q4 2022, the same as in Q3 and Q2. This reading, however, has a 52-percentile standing; it is still above its median. Nonmanufacturing saw an improvement in the outlook to -3 in Q4 2022 from -5 in Q3; it previously was -10 in Q2, and the Q3 reading has a 69.3-percentile standing in its historic queue of data.

Summing up... On balance, the Japanese data are still equivocal with queue rankings perched ‘precariously’ around the 50-percentile mark for many readings. A sudden slip or a surge could change interpretations sharply. The manufacturing sector is showing some slippage. The outlook remains less than robust with just a small drop on the month and to a below-median standing- a standing that is not above the median by very much. Nonmanufacturing that's not a bellwether improved on the month and has a higher queue standing for its reading in a historic context. Large, medium, and small enterprises show at least two quarters of improving trends for the Tankan. However, the outlook for both large sector responses for Q4 slipped. Japan’s economy has been struggling. The BOJ continues to do what it can, but it is limited in its policy options. The yen continues to flounder at historically weak levels on the exchange markets, something that should help to revive manufacturing because of the boost to competitiveness. However, it's also something that creates problems for import industries and particularly for energy that is imported and usually priced on world markets in dollar terms causing the weak yen to be more of a problem for Japanese energy users. In short, the Tankan this month is another disappointing report for Japan, but on the other hand it's not surprising.