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Analysts at Nomura noted that the September BOJ Tankan survey showed weaker business sentiment.

Key Quotes:

“The current business conditions DI for large manufacturers was +19, deteriorating 2pt from the previous survey (June), while the DI for large non-manufacturers was also down 2pt from the previous survey at +22. These results were weaker than market consensus. Our economists expected a deterioration in future DIs, but  current  sentiment was weaker than expected. The unchanged future DI of non-manufacturing was the only small positive surprise from the confidence DIs.

In terms of the price outlook, large corporates’ current assessment of “changes in output prices” improved from the June survey, while the future DI weakened. Although energy prices have been rising, large corporates’ assessment of input price changes did not rise. Inflation expectations among corporates will be released tomorrow, but there may not be a meaningful improvement. Large corporates’ assessment of labour shortages worsened further (more shortages), while large manufacturers’ assessment of production capacity improved (less  shortages). These also suggest mixed inflation momentum.  

The survey results also showed that the reversal rate is still far off again (Corporates’ view on lending attitudes among financial institutions has stayed very positive, suggesting financial institutions have maintained their accommodative stances.  

While the negative side-effects of BOJ easing have attracted market interest, there are limited signs of the side-effects of slowing banks’ lending activity. The BOJ changed/tweaked its policies in July and Governor Kuroda suggested the Bank is now monitoring the efficacy of changes.

While the BOJ is likely to reduce its JGB purchases further, concerns over side-effects may not lead to rate hikes by the BOJ anytime soon. The Semi-annual Financial System Report scheduled for publication later this month is still worth monitoring, but changes in the BOJ’s policy stance are unlikely to alleviate the side-effects on financial institutions.  

Manufacturers’ assumption of USD/JPY did not change materially from three months ago, even though USD/JPY rose during the period. For H2 FY2018, the average assumption is just at 107.29, largely unchanged from 107.26 in the previous report.

This suggests Japanese exporters may not be in a rush to sell USD at the current spot of around 114, as the risk of USD/JPY breaching that level is limited. We also note that as a result of the recent recovery in oil prices, Japan’s trade balance is deteriorating.

In the near term, corporates’ flows may not put much downward pressure on USD/JPY.  

These survey results show that a BOJ tightening is very unlikely, which should sustain strong foreign portfolio investment by Japanese investors. A deteriorating trade balance and strong FDI outflows also point to corporates  flows  turning more JPY negative too. As risks from US-Japan trade tensions have declined, upside room for  yencrosses  is clearly increasing.”