The Bank of Japan’s closely-watched Tankan survey of Japan inc. in the March quarter fell short of expectations almost across the board, with business sentiment among large manufacturers coming in at its lowest reading since the June quarter of 2013. No joke. Here’s what some economists think:

Izumi Devalier from HSBC offers a succinct explanation of why business sentiment deteriorated in Japan:

The results of the latest Bank of Japan Tankan survey showed that weak demand and a stronger yen have taken a toll on business sentiment: both manufacturers and non-manufacturers reported a deterioration in business conditions and remain pessimistic on the outlook. Other details of the Tankan report offer evidence that underlying inflation pressures are softening.

She adds that the results strengthen the case for the BoJ to loosen its monetary taps further in this month’s monetary policy meeting.

Ryutaro Kono from BNP Paribas says “we cannot rule out the possibility that the economy has entered recession”, as “the deterioration of business conditions in large enterprises will likely spread to SMEs.” He adds:

With the these results, the BoJ would no doubt be strengthening their sense of caution with regards to the economic outlook. The BoJ only implemented its negative interest rate policy in January and the Tankan results won’t directly lead to further monetary easing in this month’s monetary policy meeting. However, if international markets destabilise further and the yen strengthens, then they will act.

Strategists at Bank of America Merrill Lynch say the Tankan results have political implications:

The results have raised the possibility of the Abe administration delaying the consumption tax rate hike…

The Abe government is expected to wait until the Q1 GDP results to decide on stimulus packages and whether to go ahead or delay consumption tax hike. But the Tankan results raises the concern of economic downturn. The debate over consumption tax hike will likely lead to double elections of both houses of the Diet… political event risks are rising.

The survey period covered the BoJ’s negative rate policy announcement, which dented business sentiment in financial institutions, notes Yasunari Ueno from Mizuho Securities:

Bank earnings are under severe pressure from both lower interest rates on loans and yields on investment securities. This has made them less willing to take on risk, creating a growing threat to the smooth functioning of the financial system. That is highlighted starkly by the lower Business Conditions DIs among banks and shinkin banks & other financial institutions for small businesses.

Financial institutions are not included in the regular business conditions results, but are also surveyed in order to supplement the survey.

But some argue that there were positive takeaways from the Tankan. Nobuyasu Atago from Okasan Securities, and formerly of the BoJ, says:

All enterprises expect 4.8 per cent decrease in fixed investment in fiscal 2016, but that’s not bad compared to 5.0 per cent decrease expected for fiscal 2015 in last year’s March Tankan, and we can expect upward revision.

Tankan’s fixed investment figures move inversely with production capacity diffusion index (DI), with the DI pointing towards insufficient capacity. Looking from that side, it won’t be strange if fixed investment increases further in the future.

And economists at Mitsubishi UFJ Morgan Stanley argue:

In the past, business sentiment and lending attitude of financial institutions tended to deteriorate together in times of recession. However, lending attitude rose significantly in the latest Tankan. Extremely accommodative monetary conditions have stopped the economy from falling further back.

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