Japan’s Economy: Tankan survey shows economy stalled but with some resilience

COVID-19 delivered final blow to the Japanese economy

The Bank of Japan's latest Tankan quarterly survey in June showed the business condition index (DI) for large manufacturers which indicates the business sentiment of large manufacturing companies was minus 34, the worst in 11 years since 2009 when the Japan’s economy plummeted as a result of the global financial crisis. 

As for future outlook, the DI also suggests it will take some time before the economy to recover. The deterioration of DI for large manufacturers was the second largest in the past, falling 26 points from the March survey. It is the second consecutive quarter of minus DI and the sixth consecutive quarter of deterioration. 

The global pandemic of the new coronavirus may have delivered final blow to the business’ sentiment in Japan already hurt by the US-China trade friction. DI for large nonmanufacturers also deteriorated by 25 points to minus 17, the worst ever. 

In the past prolonged depressions in Japan, DI (actual results) for non-manufacturing fell and the drop rate was larger than DI (forecast) during preceding period of depressions. Investors keeping a close eye on the Tankan survey may have found that omen and are worried long economic stagnation to come.

Deteriorating across the board but some sectors show durability

The business sentiment of large companies deteriorated across the board except for retail industry. DI for retail sector increased by 9 points to plus 2. 

The hotel and restaurant sector was the hardest hit falling to minus 91, the lowest ever as entry to Japan was restricted and people were refraining from going out to contain the spread of infection. The worst sector in the manufacturing industry was the automobile, which is Japan's core industry. It dropped 55 points to minus 72. 

On the other hand, sales at supermarkets and home centers were brisk as more people spent time at home instead of dining out over coronavirus fears. In addition, information services, which enjoy strong demand from growing teleworking posted plus DI. 

Telecommunications also secured positive territory. Although business sentiment is severe, there are some signs that the economic activity is recovering gradually in some sectors and investors expect that the economy would hit the bottom during April to May period led by growing domestic demand.