The quarterly economic release of the Japanese Tankan Survey is one of the most important surveys of Japan. It provides a measure of general business economic and trade activity. Japan is a nation that lacks natural resources and, because of its small size, is heavily dependent on their export market to attract foreign reserves to sustain its economy. Once the Bank of Japan has conducted their survey, the results are used to direct optimal monetary policy.

The focus on past quarterly trends coupled with present conditions and a question about future forecasts helps to further anticipate economic trends. Total Tankan Surveys are usually fairly lengthy and cover major economically strategic categories with various detailed subsets. (For information regarding economic indicators, review Economic Indicators: Overview.)

The Purpose of the Survey

The survey outlines a comprehensive picture of the health of Japan. Knowing the importance, respondents of Japanese companies honestly answer survey questions including expected capital expenditures. One of the most important and most monitored survey questions is regarding expected business conditions because it allows the government to predict production and exports. The Japanese employ a Diffusion Index and survey over 10,000 companies to measure favorable and unfavorable business conditions. Respondents are queried for their gauge of present conditions and further queried for a future forecast. Subtract the favorable from the unfavorable from all Japanese companies in the survey and the number is released as the official Tankan Survey rate. This figure allows investors to predict the overall movement of the Japanese economy.

Supply and Demand

Another area of interest and subset of business conditions is supply and demand conditions, inventories and prices for manufacturers. This focus is centered strictly to gauge the domestic economic climate because of Japan's dependence on manufacturing. Supply and demand includes basic materials and processes. The Japanese again employ a Diffusion Index that measures excess demand minus excess supply. Answers for Tankan Surveys are usually recorded by the Bank of Japan as a value which depicts the basic sentiment of the economy. Such a presentation allows for a national historical comparison to be presented in a concise manner.

Large manufacturers' opinion will be reflected the Japanese exchange rate, as net trade balances fluctuate from period to period. Answers are accumulated quarterly and are then averaged. Based on historical data and future expectations, the Bank of Japan develops an understanding of the monetary policy which is required to attain a stable exchange environment. What is amazing is the accuracy of these predictions and the ability of the Japanese to chart these predictions to form trendlines to determine future direction. (To learn more about global trade, read Global Trade And The Currency Market.)

Materials and Goods

Further subset questions of business conditions are "inventory level of finished goods" and "merchandise and wholesalers inventory". The largest focus asked concerns regarding basic materials and processing goods. Both are also measured with a Diffusion Index of favorable values subtracted from unfavorable values, thus providing a metric to evaluate the performance of the industry.

The last subset questions pertain to change in output prices and change in input prices. Both are measured by a Diffusion Index of rise minus fall and measured based on past, present and future predictions.

Sales

Next category is sales (current profits), ratio of current profits to sales and net income. Except for net income, these categories are asked to all manufacturers and non-manufacturers and delineated by small, medium and large companies. Answers are factored based on previous forecasts and present rates. These rates are called revision rates and are calculated as the percent change between current and previous surveys.

The fixed investment category includes such items as land purchasing expenses and software. Financial institutions including banks, insurance companies, securities companies and non-deposit institutions are also included in this section of the survey. The financial industry is omitted from other sections of the Japan Takan because the test primarily focuses on manufacturing. Responses to the fixed income category, in addition to other measures of the analysis, can have a significant impact on interest rates.

Employment conditions are determined for all industries with a diffusion index based on excessive employment minus insufficient employment. Furthermore, depending on the responses to some of the aforementioned criteria such as manufacturing forecasts, unemployment numbers can be determined. (The structure of major companies in Japan is steeped in tradition and relationships. For more information, check out Understanding Japanese Keiretsu.)

Corporate Finance

Corporate finance includes five categories. The financial position of the companies is asked of all industries categorized by small, medium and large companies. The answers are factored using a Diffusion Index of lax minus tight conditions. The cumulative value of the financial position can give insight into the national availability of credit. Lending attitude of financial institutions is asked for companies making up the financial industry and recorded with a Diffusion Index of accommodative minus severe conditions. Other financial inquires pertain to areas of interest rates on loans, conditions of commercial paper issuance and ratio of liquidity. Similar to the capital expenditure based questions, which dictate the general movement of the manufacturing sector, these questions give an overview of the financial economic environment.

Business conditions of financial institutions is the last category of the Tankan Survey yet questions and results are not found in the official Tankan Reports. Instead they are found in the summary reports and used strictly as a supplement to gauge overall conditions.

The Tankan Survey is mailed to all companies in Japan on a quarterly basis. It is mandated by Japanese Statistics Law 53 passed in 2007. Historically, the survey began in 1957 with regular updates and revisions such as the latest 2007 revisions to reflect new and changing business conditions in Japan. For example, the 2007 revisions increased the sample sizes from 9,789 companies to 11,026. Companies are not mandated to respond yet the participation rate is very high.

The Bottom Line

In this instance, the Diffusion Index has always been factored based on performance to actual results. Yet ranges have changed. Instead of favorable to unfavorable, middle categories were inserted such as somewhat favorable. This changes Diffusion readings. Large companies are classified as $1 billion yen or more, medium companies are classified as $100 million yen to less than $1 billion and small companies are classified as $20 million yen to less than $100 million. (For further reading, refer to The U.S. Dollar And The Yen: An Interesting Partnership.)

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