Yen To Dollar : The Tankan Survey
If you haven't come across the Tankan survey before, I would
suggest you
take note of it, particularly if you trade, as it is an extremely
important indicator with which to forecast future yen to dollar rates.
The Tankan is an economic survey of Japanese business issued by the
central
Bank of Japan, which it then uses to formulate monetary policy which
is why it is so important. The report is released four times a year in
April, July, October and mid-December.
Yen To Dollar : Tankan Explained
Sentiment indicators often get a bad press, sometimes considered to be unpredictable and lacking weight. The Tankan is one that runs counter to this argument, and its importance cannot be over emphasised as the data that is obtained is used by the Bank of Japan to formulate and develop monetary policy going forward. The survey covers thousands of Japanese companies with a specified minimum amount of capital, although firms deemed sufficiently influential may also be included. The companies are asked about current trends and conditions in the business place and their respective industries, as well as their expected business activities for the next quarter and year. The report itself is broken down into five key elements as follows :
Capex - this measures capital expenditure by all Japanese industries except the financial sector.
Large Manufacturers Index - this is the main component of the survey. The index uses zero as the baseline between positive and negative outlooks. High positive values suggest that companies view the future positively with increased production.
Non Manufacturers Index - this index reflects the prevailing sentiment of firms in the service sector. The companies conduct most of their business within Japan, and this index therefore reflects both the strength of domestic demand, and the health of the non-export sector. The Non-Manufacturing Index is also important as a measure of overall economic health.
Large Manufacturers Outlook - this provides a forecast of the index for the next quarter
Non Manufacturers Outlook - as with the above, this provides a forecast of the index for the next quarter.
In addition to the above there is also an interesting section in the survey which collects data from the major manufacturers on where they feel the yen to dollar rates will move in the next 6 month and 12 month periods.
Yen to Dollar : Large Manufacturers Index
The
large manufactures index is the main component of the report,
and is the most eagerly awaited. The Tankan's sentiment index
measures the percentage of companies reporting that business
conditions are better, minus those reporting that conditions are
worse. The higher the number, the greater the portion of
companies that are optimistic. The figures signal that Japan's
big exporters, which drive the world's second-largest economy,
are weathering any economic volatility better or worse than
expected. I have included above a chart of the index from 1973
to the present. As you can see the solid black line represents
the large enterprises and has been rising steadily since moving
from negative to positive territory in 2003. Note the collapse
in confidence following the bursting of the bubble economy in
early 90's and how long it has taken for the confidence to
return to the economy. The significance of the chart cannot be
underestimated as it includes all the major manufactures in the
electronics and automotive industries.
Yen to Dollar : Non Manufacturers Index
The
chart above shows the non manufacturers index from 1973 to date, and
again we can see a similar pattern to the the large manufacturers. The
index closely reflects consumer sentiment in the service sector along
with the broader economy as the respondents are generally supplying
their services to the home markets.
I hope that has given you a better understanding of the Tankan survey and how important it is as a sentiment indicator of the economy and why it moves the yen to dollar rate. Finally let's look at the yen carry trade.