There has been something odd about the yen, lately, tomorrow we might get some clues as to why.
There is a host of key data coming out, but the Tankan survey could answer a couple of open questions. It could also give better insight into where the exchange rate is heading in the medium term.
Over the last couple of weeks, there has been a drop in appetite for risk as different countries around the world reported an increase in COVID-19 cases.
The US, in particular, has seen a dramatic rise. One would expect to see a stronger yen, but the currency has traded largely flat, almost in limbo.
Where Are We Going?
After a surge in optimism as economies reopened in early June, we seem to be around the point where the markets might continue to rise, or tumble over into the second part of a W-shaped recovery.
At the same time, there are questions about how much longer central banks can continue to buy unprecedented amounts of assets.
The question now is where do companies see things going? Because that will be detrimental for the evolution of investment and major spending initiatives that will support the currency in the long term.
As we are about to enter second-quarter earnings’ season, there is a substantial expectation that most major companies will resume guidance issuance, and give clarity on their capital expenditure programs for the rest of the year.
Another important source of corporate expectations, of course, are business surveys. The Tankan is the largest and most thorough in Japan.
It could, therefore, have a lasting effect on the markets. Some Japanese companies have already started to issue guidance. However, the majors have not as yet.
Tankan might give us some forewarning about what market makers in Japan are thinking.
What We Are Looking For
Usually what the market focuses on as a headline number is the Tankan Large Manufacturing Index. However, this time around, the Capex component might be the most important.
Corporate capital spending is often what drives the economy more than the current situation. Less spending implies less growth in the medium to long term.
Expectations are for the Tankan Large Manufacturing Index to sink to -31 from -8 in the prior reading, the worst performance since the ’08 recession. Keep in mind, though, that the perception of the situation among Japanese large firms had been falling at the same rate all the way since the end of 2017.
Projections are for the Tankan Large Manufacturing Outlook to not be so bad, coming in at -24. This is compared to -11 in the prior release. Again, though, this is the worst result since the last recession. However, it could be a sign that there is optimism about the medium term.
Expectations are actually for the Tankan All Industry Capex survey to increase to 2.1%. This is compared to 1.8% reported in April, showing that businesses are looking to increase spending in the future.