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Volkmar Baur at Commerzbank highlights solid Japanese activity data, with the manufacturing PMI at 54.8 and the Tankan business conditions index at its highest since 2003. He stresses that Tankan output price expectations have been a reliable inflation indicator, and their recent rise suggests the Bank of Japan may need to consider faster rate hikes, which would support the Japanese Yen.
Tankan hints at tighter policy
“Sentiment in the Japanese economy appears to be solid. The Purchasing Managers’ Index (PMI) for the manufacturing sector was confirmed yesterday at a strong 54.8 points (the flash estimate was 54.9).”
“And in the Bank of Japan’s broader Tankan survey, which covers more companies, the diffusion index for business conditions remained unchanged from the first quarter at 18. This is the highest level since 2003.”
“However, the survey also contains a warning for the Bank of Japan. This is because the output prices sub-component among large manufacturing firms has consistently been a very good indicator of inflation in recent years. Only in 2014, when a sales tax hike artificially raised the consumer price index, was there a significant divergence.”
“The recent rise in the subcomponent – which contrasts with the recent decline in CPI – should therefore give the central bank pause for thought.”
“With sentiment indicators at high levels and price indicators in a dangerous range, it might be time for the Bank of Japan to consider slightly faster interest rate hikes after all. The JPY would certainly appreciate that as well.”
