JPY: BoJ Tankan implications – Deutsche Bank

According to Taisuke Tanaka, Strategist at Deutsche Bank, the latest BoJ Tankan featured a fourth successive improvement in the benchmark business condition DI for large manufacturers, to +22 (versus the +18 market forecast).

Key Quotes

“The large non-manufacturer DI remained at +23, below the market's +24 forecast but still firm. Both expectations DIs were +19, indicating companies' cautious stance.”

“The dollar-yen cycle tends to lag Japan's economic cycle as indicated by the Tankan DI. In that sense, the recent improvement in DI is consistent with our continued outlook for a bullish mood on USD/JPY. Further, if we take the UST 2-year yield in Figure 2 as a proxy indicator for the US economic cycle, Japan's economic cycle clearly follows that in the US. The first condition we focus on for USD/JPY to return to above 115 is a sustained strong pace of more than 2% growth in the US.”

“The USD/JPY assumption used by large manufacturers in the latest BoJ Tankan is 109.29. Many exporters currently set their internal USD/JPY rate at 110 or below, making the prevailing 112-113 a favorable level. Should USD/JPY fall below 110 on geopolitical risk or negative US economic news, hedge selling by exporters in a subsequent rebound would likely create resistance at around 110. However, the experience of the past six months suggests that 110 would not be a particularly strong resistance line, indicating exporters' level-headed trading stance.”