Tankan Highlight for Japan in the Week Ahead

One of the most watched reports from Japan, the Tankan Survey, will be reported on July 1st in Tokyo. The results for large manufacturers is often the headline and it has fallen uninterrupted since the middle of 2007. Unsurprisingly it collapsed since the middle of last year. However the next reading should show the first improvement in 3 years. The consensus is for sentiment among large mfg to improve to around -45 from -58. Improvement is also expected for large non-manufacturers. If there was an improvement in small businesses, it is likely to be more modest. There is unlikely to be any significant improvement in capex plans.

Prior to the Tankan survey, Japan will report other data that taken together will point to a still very weak economy, though stabilizing. The data will likely indicate that domestic demand is poor so the expected increase in industrial output may be re-stocking and made-for-export.

May industrial production figures will be reported Monday. Japan will likely report its third consecutive month-over-month rise. The May figures are expected to be the strongest in the streak, rising around 7% after an almost 6% rise in April and a 1.6% gain in March. Nevertheless, even with these gains, Japan's industrial output will still be almost 29% lower than a year ago.

Retail sales, household spending and employment figures will be released as well (Mon and Tues) and this is where the weakness of the Japanese economy will be truly apparent. Retail sales and household spending are still contracting and unemployment continues to rise.

In terms of the yen, we would first point out that it seems more often than not the yen is driven by non-Japanese developments. Second, to the extent that the strong month-over-month rise in industrial production lifts the yen, data-inspired gains are unlikely to be sustained. The recovery story gaining traction elsewhere may weigh on the yen. Key dollar support is seen in the JPY93.50-JPY94.00 area, levels that have not been violated since Feb.

The euro-yen cross is closely followed as well. The euro has held an uptrend beginning in early Feb and tested in mid-Feb, late April, mid-May and then earlier this week. It will come in near JPY132 early next week and a break of this trend line could spill over and weigh on the dollar against the yen as well. The trend line in sterling-yen is not as crisp as euro-yen, but it comes in just below JPY153 early next week.