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    Tankan survey underlines growing optimism in Japan’s economy

    The Bank of Japan’s Tankan quarterly survey of business sentiment showed improving sentiment across industries in Japan in the second quarter of the year. The Tankan large manufacturing index was the highlight as it improved for the first time in three quarters. The index rose to 15, against expectations that it would stay unchanged at 12. The large manufacturing outlook had its highest reading since the third quarter of 2007 as it came above estimates. The index climbed to 16 from 10, against a forecast of 14.

    The non-manufacturing index was also strong, coming in just above estimates at 23 compared to 19 in the previous quarter. The performance of large companies was significantly stronger than that of small- and medium-sized enterprises, particularly in manufacturing, as they benefited from the weak yen. The large all-industry capital expenditure index was also positive showing that big companies expect to increase their capital spending by 9.3% , versus a decrease of 1.2% previously. This was sharply above estimates of a 5.3% increase.

    The overall outlook for all industries was unchanged at 7 in the second quarter as the improving sentiment by large manufacturers and the service sector offset weaker outlook by small- and medium- sized manufacturing firms. This could weigh on GDP growth in the second quarter. After a strong 3.9% annualized growth in the first quarter, Japan’s GDP is expected to slow to a 1.3% annualized rate in the second quarter.

    The slowdown is not significant enough though for the Bank of Japan to change course on its current program of quantitative easing. While an expansion of its asset purchase program in the autumn remains a possibility, the Bank of Japan is likely to pay closer attention to how quickly inflation starts to return closer to its 2% target in the months ahead and how inflation expectations change over the course of the year.

    With growth in China showing no signs of picking up anytime soon after disappointing June manufacturing PMI and Greek uncertainty threatening to jeopardize Eurozone recovery and unsettle emerging market economies, the strength of the yen will be a key factor in determining Japan’s performance for the rest of the year.

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