JPY: Tankan shows cautious optimism – MUFG

Derek Halpenny, European Head of GMR at MUFG, notes that the yen is broadly unchanged with the surge in Japanese equity markets and the hopes of reflation fuelled by President-elect Trump next year the key driver of recent yen weakness.

Key Quotes

“The Topix Index is up 18% since the day of the election and Trump has given Japan a vital ‘Abenomics’ revival.”

“The Tankan report today did reflect an improvement in optimism which was expected given the moves in the markets and the hopes based on Trump’s election victory. Sentiment improved in every segment apart from Non-manufacturing large enterprises which remained at +18. Caution was mainly evident in the little change to capital spending plans. Overall capex plans for all enterprises in all industries was revised higher by just 0.2ppt to a modest 1.8%.”

“The good news is that the sentiment reading by corporate Japan were based on USD/JPY levels considerably below current spot levels – the H1 assumed level was 106.52 and the H2 level was 103.36. The full FY2016 assumed level has dropped from 111.41 in the June Tankan to 107.92 in the September report to 104.90 in today’s Tankan. With USD/JPY some 10 big figures higher, corporate Japan will benefit if the current spot rate can hold.”

“Whether that happens will be very much more about Donald Trump than PM Abe. From a valuation perspective we continue to be sceptical of USD/JPY sustaining levels above 115.00 and continue to see potential for some yen strength from excessively weak levels.”