economic expectations

Japan’s Tankan Survey revealed that large manufacturers’ economic expectations improved for the second consecutive quarter in the three months to September, with the forward-looking Outlook gauge rising to -21, the highest in a year. Non-manufacturing firms also saw an improvement in their three-month forecast, with that metric up to -17, the highest since the end of last year. Both figures remain in negative territory however, which means pessimists continue to outnumber optimists among the firms polled for the survey, albeit by a smaller margin. Perhaps most tellingly, an index of capital investment fell -10.8% in the third quarter, the most in nearly 10 years, showing that firms continue to slim down their operations on expectations of lackluster demand. Indeed, the survey showed that sales are expected to fall -10.5% through the 2009 fiscal year (12 months ending April 2010), more than doubling the drop in FY2008.
Retail Trade added 1% in August, bringing the annual pace of contraction to -1.8%, the lowest since November of last year, and Large Retailers’ Sales shrank at a slower than expected -6.8%. This makes sense considering consumer confidence rose for the eighth consecutive month in August, but sentiment has closely tracked the Nikkei benchmark stock index and so is highly vulnerable to any downward reversal in risky assets. Shares will be left wanting for a catalyst considering the sales outlook implied by the Tankan report, pointing to disappointing earnings and a downward reversal in equities and by extension in consumer confidence and retail activity. Rising unemployment also presents a considerable hurdle, with the jobless rate set to approach 6% by mid-2010.
Broadly speaking, today’s data flow is supportive of the minutes from Augusts’ meeting saw policymakers conclude that the pace and sustainability of any economic recovery remains “highly uncertain” after the effects of fiscal stimulus and the inventory restocking cycle run their course, while domestic consumption remains weak.