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Japan's Tankan softens for Q2 but further downside expected in Q3

The Tankan reads for both current and outlook indices lowered today but we have to be prepared for a significant downside revision the following quarter, as this survey was conducted mostly before the Brexit vote materialised. 





The pattern across many indicators all point towards lower growth for Japan. Whilst not the cleanest, there is a correlation between the quarterly Tankan manufacturing and GDP reads. If manufacturing is positive, then GDP is predominantly positive and visa-versa. However, as the Tankan read beings to point down, GDP becomes lower and both eventually contract. We now see the manufacturing read trending downwards having seemingly topped in March 2014 at the level of 16 whilst GDP remains tepid and on track towards zero with manufacturing.

The smaller cart index shows Japan's Leading Economic Indicator which has now crossed below zero, an event which rarely occurs without significant downside ahead. We await the confirmation signals from there indicators but from this basic assessment, it would appear that growth will continue to dwindle at best then revert to contraction.



It is worth pointing out that the bulk of data from today's Tankan reads were taken before the UK voted for Brexit. Therefor we could expect, at the very least, a greatly reduced outlook ahead from the indices. Manufacturing outlook is already on the cups of contracting with the manufacturing index not too far behind. Whilst Non-manufacturing outlook also sages to the downside it remains far more elevated compared with manufacturing, which could continue to help support GDP but then on the other hand, as far more further to fall depending on how much the sector relies on the UK. 




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