USD/JPY: Trading the Tankan Manufacturing Index

The Tankan Manufacturing Index is an important leading indicator, based on a survey of about 1200 large Japanese manufacturers, who are asked for their opinion on general business conditions. As such, the index helps provides a picture of the current business climate in Japan. A reading which exceeds the forecast is bullish for the yen.    

Here are all the details, and 5 possible outcomes for USD/JPY.

Published on Wednesday at 11:50 GMT.

Indicator Background

The manufacturing sector is a vital component of the economy, and the Tankan Manufacturing Index, released quarterly, provides a useful reading for determining whether the economy is in a growth or contraction phase. A reading above zero is indicative of economic growth.

The June reading was a dismal -9, but the index rebounded nicely and climbed to 2 in October. The market forecast for December is  back below the zero level, at -2.  Will the index continue to stay in positive territory?

Sentiments and levels

Economic indicators in Japan are sending mixed messages to the markets. Manufacturing is showing improvement, while the retail and services sectors are down. The yen may lose some ground against the dollar due to the global slowdown and the improving US economy. So, the overall sentiment is neutral on USD/JPY towards this release.

Technical levels, from top to bottom: 80.25, 79.50, 78.30, 77.50, 77, 76.75, 76.25, 75.95 and 75.57.

5 Scenarios

1. Within expectations:  -7 to 3: In such a case, the yen is likely to rise within range, with a small chance of breaking higher.
2. Above expectations:  4 to 9: An unexpected higher reading can send USD/JPY below one  support level.
3. Well above expectations: Above 9: The chances of such a scenario are low. A second support line might be broken on such an outcome.
4. Below expectations:  -13 to -8: A lower reading than forecast would push USD/JPY upwards, and one  resistance level could be broken.
5. Well below expectations: Below -13: A reading in deep negative territory would signal a significant contraction in the manufacturing sector. In this scenario, the pair could break two  resistance levels.

For more on the yen, see the USD/JPY forecast.