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Economy in Brief

Japan's Tankan Improves but is Short of Expectations
by Robert Brusca  April 1, 2013

Japan's Tankan reading in 2013Q1 for manufacturers rose to -8 from -12 in Q4. This was just short of expectations that a -7 reading would emerge. Non-MFG improved to +6 from +4.

The readings are still weak. The MFG survey stands at the 23rd percentile of its historic queue (i.e. it is weaker only 23% of the time and stronger 77% of the time). While it's a quarter-to-quarter improvement, the index is still languishing. Non-MFG is doing better as it stands at the 47th percentile of its queue nearer to the middle or median.

Construction is benefiting as expected in the wake of the tsunami and nuclear disasters. That sector stands in the 97th percentile of its historic queue - it has rarely been stronger. But not much of this strength seems to be filtering out to the rest of the economy.

Among the non-MFG sectors transportation, wholesaling, restaurants and hotels & retailing are the weakest - at or below their respective queue midpoint (50th percentile or lower). Personal services and services for businesses are doing quite well while real estate is just a bit above its midpoint.

The outlook survey has higher absolute numbers compared to the current reading, but that is not very meaningful as a comparison. When we evaluate the outlook relative to its own history, the current MFG reading of -1 stands in the lower 15th percentile of all historic observations (its queue) - that's even weaker than the relative standing for its current reading for this month. The non-MFG outlook stands in the 41st percentile of its queue, just a bit lower than its current standing in Q1. There is some improvement in the large-firm environment but nearly enough.

Medium-sized firms showed setbacks in the quarter. Manufacturing fell back to -14 from -12 to stand in the top 58th percentile of its historic queue. The MFG outlook for medium-sized companies rose to the 75th percentile of its queue. Non-MFG improved by five points and stood at the 91st percentile of its queue with the outlook rising to the 64th percentile. Medium-sized businesses are seeing big improvements in the outlook even when the current situation slipped.

Small firms still give poor responses in the survey. Small MFG firms still register at -19 on the raw Tankan survey, and are another group that has eroded quarter to quarter dropping from a -18 reading in Q4 of 2012. The current reading is actually moderate in comparison with what the sector historically reports. That -19 reading stands in the top 43% historically of all responses, at a point above its midpoint. Non-MFG, however, improved in the month, gaining three points month-to-month in the survey to stand at the 94th percentile of its queue. The outlook for small business is stellar with the MFG reading at the 83rd percentile of its queue and the non-MFG reading at the 68th percentile as current conditions are still elevated.

While the focus for Japan is usually on the Tankan's large companies and while there is some progress there, it is still slow and this quarter did not quite reach the degree of improvement hoped for. But the medium-sized and smaller firms reporting are showing either current progress, sharply improved expectations or both. On balance, the report is still a positive one.

Non-MFG firms are making the largest gains overall while MFG firms are more prone to be struggling. In the large company survey, the quarterly rebound still leaves the month's reading weak and below all MFG readings since Q2 of 2010. For medium-sized firms, non-MFG is making continued strong gains with non-MFG showing its best reading since 2007. Even so medium-sized MFG firms are struggling and their current situation is still eroding, but their outlook improved this month. Small businesses are clear winners with non-MFG showing continuing gains and MFG in a small set back, but at a still-moderate reading. Non-MFG small firms are showing their best values since before the financial crisis. MFG small firms are holding to their crisis threshold levels of response.

The failure of MFG to do as well as non-MFG and the sluggishness of larger firms generally may have more to with the fact that these firms face more international competition in a world where growth is still weak and competitive forces are still daunting. Small domestic firms will benefit more directly from domestic policy shifts of the sort that are now being implemented in Japan. They seem to sense it.

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