Japan’s Tankan report is a net diffusion report. The bellwether for the report has long been considered to be large manufacturers. Large manufacturers posted a steady +18 net value in Q4 2021, the same as in Q3; the outlook reading for large manufacturers slipped to 13 in Q1 2022 from 14 in Q4 2021. The results are not striking; they show small changes. More important is the sharp gain logged by nonmanufactures. While not the survey bellwether, this improvement is good news. Nonmanufacturers moved up to a reading of +9 in Q4 from +2 in Q3. It’s the best reading since Q4 2019. However, concerns about the Omicron variant still swirl in Japan and could under cut this optimism.

We compare the raw diffusion reading but looking at their respective queue standings. Since each metric has its own history average tendency and volatility, we can rank the net reading for large manufacturers and services firms and total industry to compare them and see where the relative strength is the best. The queue percentiles do this by ranking each measure as a percentile standing among its past values. None of the readings have particularly strong standings in historic comparison. But the manufacturing standing is the relative best at a 61.8 percentile- that puts it above its historic median reading. Queue percentile readings have their medians at the 50% marker. So, the nonmanufacturing PMI at a 40.0th percentile standing is below its median as is the total industry gauge that climbs up just short of its median at a 49.1 percentile standing.

We can also look at the net changes in these net reading from their January 2020 levels just before the virus struck to get an idea of how much recovery has been made. On that score manufacturing has made the greatest recovery improving by 18 points. Nonmanufacturing has yet to get back to January 2020 level as it still languishes below that level by 11 points. The net total industrial reading is higher by 5 points.

The outlook survey
The outlook shows a weaker manufacturing number that eases by one point in Q4 but an improvement of 5 points for the nonmanufacturing sector. On balance, the all-industrial gauge improves by 2 points rising to a reading of 11 from 9. The manufacturing outlook at the highest queue standing at a 66.7 percentile reading with the nonmanufacturing sector below its median at 39.4%. The outlook for manufacturing is 13 points stronger than it was in January 2020 while the outlook for nonmanufacturing is weaker by 10 points.

Current detail for services
Looking at the details for the nonmanufacturing index in the current Tankan, of the eight categories four are weaker than they were in January 2020, three are stronger and one is unchanged. The category services for business is unchanged from its January 2020 value but it is also at its 93.9 percentile standing – a very high reading. Wholesaling has a solid 78.8 percentile standing. Construction is above the 50th percentile mark at 51.5%. The remaining results are below their historic medians.

While the service sector picked up this month, it is still mostly lagging and service sector recovery is threatened by the Omicron virus more than manufacturing. Large companies generally plan to increase capital expenditures by 9.3% in the year ending March 2022, compared with the 10.1% increase planned in the previous survey. Obviously, the outlook is not robust and involves some caution and pull-back.

Table 1: Large Company Tankan

The queue rankings in the table below repeat the values for large companies and compares of all sizes from a similar TANKAN survey for medium-sized and small-companies. The current reading shows that manufacturing has the strongest percentile standing among large medium and small companies. Since manufacturing is generally assumed to be in the vanguard, that is good news. The outlook or forecast portion of the table also shows the highest relative standing for manufacturing across industries of all size.

Table 2: Rankings for All-Sized Firms

On balance, Japan shows manufacturing still coming around but not strong. There is lagging improvement in nonmanufacturing, but it is ongoing.

Looking ahead, there is concern about the Omicron virus and how it will affect all countries. Japan has been slow to vaccinate, and it may be more vulnerable than others. At this point, all outlooks are uncertain. Japan’s trends are positive, but its levels of activity are not strong.