Japan’s Tankan Weakens in Q1

The bellwether for Japan's Tankan report is the manufacturing sector for large enterprises. In the first quarter, the large firm index fell to a survey value of +1, down from +7 in the fourth quarter; the fourth quarter was slightly lower than the third quarter at +8, and the third quarter was slightly weaker than the second quarter at +9. In all, there are five quarters in a row in which the large enterprise manufacturing index weakens quarter-to-quarter. And there are six quarters since the Tankan for large manufacturing firms rose quarter-to-quarter (last done in Q3 2021).

However, the nonmanufacturing index in the first quarter improved, moving up to 20 from 19. That index had improved in the fourth quarter as well. The nonmanufacturing index has been rising for four quarters in a row. Manufacturing and nonmanufacturing have been going their separate and quite different ways for some time now.

At a +1 reading in Q1 2023, the manufacturing index for large enterprises is weak; it has a 26.7 percentile standing that compares to nonmanufacturing at +20 in Q1 2023, where the index has a 74.7 percentile standing.

Nonmanufacturing industries Among the nonmanufacturing sectors, the weakest standing is for restaurants & hotels with a 44th percentile standing, although that sector made a strong improvement in the fourth quarter, moving from a -28 reading to 0 and staying there in the first quarter of 2023. Transportation has a sub 50% ranking with the standing at the 48th percentile mark; transportation weakened sharply in the first quarter falling to a +10 from a +17 reading in the fourth quarter. The strongest nonmanufacturing industries from a ranking perspective are personal services with a 76-percentile standing, retailing with an 90.7 percentile standing and wholesaling with a 98.7 percentile standing.

Outlook survey The outlook survey for the second quarter sees manufacturing weaker at a reading of +3, down from +6 in the first quarter; the outlook has weakened for four quarters in a row. Nonmanufacturing has strengthened its outlook for Q2, rising to a reading of +15 from +11 in Q4 2022. The outlook for manufacturing has a 26.7 percentile standing while nonmanufacturing has a standing in its 74.7 percentile.

Since COVID The table also offers longer comparisons on changes in the Tankan reading from Q1 2020 before COVID struck. On this timeline, manufacturing has improved by 9 points and nonmanufacturing is better by 12 points. The outlook for the quarter ahead is stronger for manufacturing on that timeline by 14 points while the nonmanufacturing outlook is stronger by 16 points..

Summing up Japan’s Tankan report has somewhat mixed performance between the two main sectors. However, the most important sector, manufacturing is clearly weaker than nonmanufacturing for both the current quarter and for the outlook. Manufacturing is also lower in absolute terms in the current quarter and for its outlook, while nonmanufacturing is stronger quarter-to-quarter on both those measures. That is not good news since manufacturing is the bellwether for this report. Globally manufacturing has been doing worse than the service sector, a sector that has been showing some revival. Japan fits in with the global picture. But that does not mean the global scene will continue or that the service sector will drag manufacturing to stronger ground. Manufacturing tends to be more cyclically sensitive sector. And central banks are still raising interest rates with inflation still running hot. Quite apart from Japan’s view of large manufacturers as the bellwethers, the global scene give us reason for the same conclusion as events in train provide grounds for skepticism in the area of continued nonmanufacturing strength.