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Yen To Dollar: 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.

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.

Tankan Survey - Manufacturers IndexThe 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.

Tankan Survey - Non ManufacturingThe 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.