Japan's Tankan Improves, Nikkei Drops Below 10,000

because recent yen surge wasn't priced in ...

Japan Tankan Sentiment Rises for Second Quarter
(9/30/09 Bloomberg)

"Oct. 1 (Bloomberg) -- Confidence among Japan’s largest manufacturers rose for a second straight quarter as global government stimulus spending rekindled exports.

"The Tankan index of sentiment among large makers of cars, electronics and other goods climbed to minus 33 from minus 48 in June and a record low of minus 58 in March, the Bank of Japan said in Tokyo today. A negative number means pessimists outnumber optimists."

Now the Tankan sentiment has recovered to the level of 2001 recession, according to Bloomberg. Although the numbers improved, companies continue to slash inventories and slash/withhold capital investment. Capacity utilization also remain low. 1/3 of Toyota's factories will remain unused, and the company will reduce capital investment by 36%.

The Tankan result is weighing heavily on Nikkei, which dropped 143 points to dip below 10,000 at the close of the morning session. Currently (at 1:18 PM Japan Standard Time) it is down 165 points to 9,967. The reason?

Japanese yen.

Companies surveyed in the Bank of Japan's Tankan based their business outlook on Yen/Dollar exchange rate at 94.50 yen/dollar, according to Japan's Nikkei article (in Japanese). Yen is currently trading in Japan at 89.79-89.82. Most exporters have priced in yen fairly stable at mid 90s. If the pace of appreciation of the currency is gradual and over time, stronger companies can still adjust, without abandoning their manufacturing base within Japan. However, rapid appreciation in short time to mid to lower 80s could finally kill off manufacturing in Japan.

It would then have little choice but to become like the U.S.: consumer-driven economy with majority of employment in the service sector, and with increasing government share in the economy.

According to the stock market commentary at Nikkei Net, the market does not like the uncertainty of the new Hatoyama administration, which is yet to clearly define its policies.

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