For any trader who has been trading the Japanese yen would have come across the Tankan surveys at some point in time. Although not as common as compared to other economic indicators, Japan’s Tankan surveys are however taken seriously by market participants.
So what is Japan’s Tankan survey and what information does it hold for the Japanese economy and how can traders capitalize on this information?
What is the Tankan survey?
The Tankan survey is a quarterly business and economic survey that is conducted by the Bank of Japan. The results of the survey are used in formulating the central bank’s monetary policy.
The Bank of Japan’s Tankan surveys covers two major industry groups, the manufacturing sector and the non-manufacturing sector and is released once every quarter or four times a year. The survey results can be accessed from the Bank of Japan’s website, or from this URL: http://www.boj.or.jp/en/statistics/tk/index.htm/
The word Tankan is a short form for the Japanese word which, when translated to English reads as Business short-term economic sentiment survey. The Tankan indicator is a sentiment indicator and is a diffusion index based on the survey of the participants.
How does the Bank of Japan conduct the Tankan survey?
The Tankan survey covers a large number of Japanese companies. To qualify for the survey, the companies must meet a minimum requirement in the amount of capital and turnover.
The companies that qualify are asked about their views on the current trends and the business conditions. The survey also seeks to find what companies think about the upcoming quarter and their view of the economy for the year.
The surveys are often released as:
- Tankan manufacturing index
- Tankan non-manufacturing index
The firms are quizzed on a number of aspects ranging from the interest rate on the loans taken, to the sales generated, the business conditions faced by the firms and the production capacity to name a few. Among the two surveys, the manufacturing index is considered more important as manufacturing and exports dominate the Japanese economy.
Below, you can see a sample of the Tankan report published by the Bank of Japan.
What are the components of the Tankan survey?
The BoJ’s Tankan reports are taken into considered by the policymakers at the central bank. The most important aspect when looking at the Tankan reports is the leading economic indicator which shows the spending habits of the firms in the coming months.
Typically, it is the firms that are at the forefront of the economy and are able to quickly change and adapt to the economy. Therefore the Tankan survey gives an early indication on how the economy is progressing based on the reactions from the big businesses.
The business conditions index is perhaps the most important and is also widely referred to by economists. There are two major groups that are surveyed. They are the large and small firms.
The Tankan index values (for both manufacturing and non-manufacturing) move around zero. If the index reads below zero or is declining it signals worsening conditions, while a reading above zero or a rising index signals improvement in the economy. The chart below shows an example of the Tankan business conditions for both the sectors.
Can you trade based off the Tankan indicator?
Knowing what the Tankan indicator is all about, the obvious question that comes to mind is whether this event can be traded.
For starters, the Tankan indicator is not a high impact indicator. Depending on the sentiment and the prevailing market conditions you can expect to see the yen react accordingly. At times the reaction to the report can be muted, and at times you can expect the reaction to be aggressive.
The Tankan indicator is basically a forward looking indicator, and it can signal which way the Japanese economy is moving. The implications of the report can be felt both in terms of policy responses from central bank officials as well as the broader GDP and inflation in the economy.