October 1, 2015, 12:00 JST

Japanese non-manufacturers shielded from global uncertainties

September BoJ Tankan delivered a few positive surprises for the economy. Non-manufacturers' business condition DI improved by 2 points and the capital expenditure plan for large corporations for the fiscal year 2015 was revised up to 10.9% year on year growth, up from 9.3% reported in the June survey. According to Reuters' survey, economists were expecting to see deterioration in the business condition for non-manufacturers and a downward revision in the capital expenditure plan.  

The business condition for large manufacturers did deteriorate by 3 points since June. However, the deterioration is more or less understandable given the appreciation of yen in the past few months and the growing concern over the emerging markets, especially China. Even among manufacturers, some industries such as transportation machinery managed to improve their business conditions.  

The decline in energy prices is the likely source of the robustness in the corporate profitability in Japan. Both input price DI and output price DI declined between June and September, but the decline in the inputs DI was larger, implying wider profit margin.  

If we are to point out a negative element in the September Tankan, we would say that the cautiousness of Japanese businesses regarding the outlook seem to be rather strong. Both large manufacturers and large non-manufacturers are expecting sizable deteriorations in their business condition by December this year, by 2 and by 6 points respectively.

To sum up, September BoJ Tankan revealed a surprisingly robust picture of the Japanese businesses, especially on the domestic side. Despite the apparent weak economic growth in the past 3 months and a risk-off sentiment in the financial markets, the profitability of Japanese corporations seems to have remained solid. The BoJ is likely to see this information as a supporting evidence for their optimistic view on the economy, maintaining their view that the positive cycle in the economy where higher corporate profits lead to higher wage and larger capital investment, leading to higher growth and a loop back to higher profits.