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Economy in Brief

Japan's Tankan Beats Estimates But Still Has Moderate Outlook
by Robert Brusca  October 1, 2021

Japan's Tankan gauge beat expectations for the performance of large manufacturing firms, but the outlook from the survey is still modest by historic standards. The manufacturing segment of the Tankan survey is the barometer the market focuses on to assess the economic performance. In the third quarter, the manufacturing Tankan registered 18, up from a value of 14 in the second quarter. At this level the Tankan reading for manufacturing firms has a 74.2 percentile standing among all values back to 2004. Compared to the first quarter of 2020 before the coronavirus began to circulate, the third quarter 2021 manufacturing Tankan is higher by 26 points, signaling substantially improved performance relative to the period just before the coronavirus struck. Despite strong gain, manufacturers are only at a moderate top 25 percentile of their historic queue of readings.

The nonmanufacturing portion of the survey showed an increase in third quarter to +2 in Q3 from a plus-one in Q2, a very minor improvement quarter-to-quarter. The nonmanufacturing percentile standing is weak in contrast to manufacturing. The nonmanufacturing queue standing is at its 25.8 percentile which puts it at the border of the lower quarter of all observations back to 2004. The nonmanufacturing survey is still six points light, compared to where it was in the first quarter of 2020. The information from the Tankan is essentially the same we get from other Japanese surveys and from other surveys around the world that show that manufacturing has recovered better or that nonmanufacturing has recovered worse and often has not fully recovered to its pre pandemic level.

The outlook portion of the survey shows that the manufacturing outlook is improved to a 14 reading for Q4 this year from 13 in Q3; this is a small pickup but the Q3 reading had showed a sharp improvement from 4 in Q2. The outlook reading itself has a 68.2 percentile standing among all historic forecasts for one quarter ahead. That's a moderately firm ranking for the outlook. The value of the outlook reading is some 25 points higher than the quarter ahead outlook was in the first quarter of 2020 before the coronavirus struck. In contrast, nonmanufacturing shows no change in the outlook for Q4 with a reading of three. The queue percentile standing for the nonmanufacturing outlook is in its 31.8 percentile which is the lower third of its historic queue of outlooks and a relatively weak reading. However, the nonmanufacturing outlook is higher in the fourth quarter compared to what the outlook was for one quarter ahead in the first quarter of 2020, but by only four points.

The industry detail in the Tankan tells us we would expect about nonmanufacturing in Japan: personal services have a low 4.5 percentile queue standing. Restaurants and hotels have a 6.1 percentile standing. Retailing has a 15.2 percentile standing. These are consumer sectors that require more contact among people; they have been hurt more globally because of the fear of spreading the coronavirus and because of steps that have been taken to try to reduce contact among people. There's also a weak reading of 24.2% for the transportation sector and that has to do with the global chip shortage as much as anything. One of the strongest sectors is services for businesses; that sector has an 89.4 percentile standing that probably reflects the fact that businesses have been held back for so long that there is a pent-up demand to provide postponed services of various sorts, especially with the manufacturing sector performing well. Wholesaling has a 69.7 percentile standing. Construction has a 54.5 percentile standing. Up and down the line with one exception, the nonmanufacturing industries have weaker percentile standings than manufacturing.

Although small and medium-sized businesses are not the most watched portion of the survey, we do have readings for them. Looking at small and medium size companies the queue percentile standings do flag one development. That is that for large enterprises the percentile standing between manufacturing and nonmanufacturing firms shows a large gap between the percentile standings. Manufacturing firms have a standing at their 74.2 compared to 25.8% percentile for the nonmanufacturing firms (gap of 48.5 percentile standing points). When we look at medium-sized enterprises, manufacturing firms have a 61.5 percentile ranking compared to a 24.6 percentile ranking which narrows the gap somewhat (to 36.9 percentile points). Looking at small enterprises, manufacturing firms have a percentile standing of 61.8% with the nonmanufacturing firms having a standing of 40.0%; this reduces the gap to 21.8 percentile points. Among the smaller firms the gap between manufacturing and nonmanufacturing is present but diminishes according to the size of the firm in the industry. In fact, the performance of nonmanufacturing firms is improved on a percentile standing basis compared to larger firms overall.

Looking at the forecasts for one quarter ahead, we see the same sort of effect in place. The percentile standing for large manufacturing firms compared to nonmanufacturing firms produces a gap of 36.4 percentile points. For medium sized firms, the difference in the outlook between manufacturing and nonmanufacturing firms is a 30.3 percentile standing gap. For small enterprises, the gap between manufacturing and nonmanufacturing firms is reduced to only 25.4 percentile points. These are small differences, but they do tend to show that the smaller firms tend to be more alike while the larger firms seem to be separated more by their industry characteristics.

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