MARKET MOVER - BNP PARIBAS - Investment Services India

point advance in the June Tankan. Production and
sales likely expanded solidly in Q3. True, the
production forecast index points to output growth in
Q3 of just 0.2% q/q, well off the 1.5% q/q tempo
posted in Q2 (and 7.0% q/q in Q1). However,
distortions in the METI’s seasonally-adjusted data –
both the production index and forecast index – cause
readings to have an upward bias in Q4 and Q1 and a
corresponding downward bias in Q2 and Q3.
Excluding such distortions (using a seasonal factor
that pre-dates the Lehman shock), our calculations
suggest that production in Q2 expanded 3.7% q/q
and the outturn for Q3 could be around 4% q/q.
Non-manufacturing sentiment still on mend
Among non-manufacturers, sectors that are direct
beneficiaries of higher manufacturing output and
shipments – such as transport and wholesale –
should show signs of continued improvement in
sentiment. Profits in these sectors should also benefit
over the short term from the yen’s appreciation in
terms of lower energy costs and reduced input prices.
Sentiment should also continue improving in the
retail trade and other consumption-related sectors
thanks to (i) personal consumption remaining firm on
the back of stimulative programmes: (ii) the steady
recovery in household income; and (iii) the boost in
real purchasing power from the strong yen. This
summer’s record-breaking heat wave will probably
not have much overall impact, as the weather was a
boon to some areas but a bane to others. Meanwhile,
sentiment might not improve for construction owing
to the government’s cuts to public works expenditure.
Spending plans largely unchanged from June
We expect the FY 2010 capital spending plans to be
little changed for large firms, namely a 3.0% increase
for large manufacturers (3.3% in June) and a 2.6%
increase for large non-manufacturers (2.4%). [Note:
Comparisons here are with the June Tankan’s
reference series under the new lease accounting
standard that will become the official data series from
the September 2010 Tankan.] Cuts in the spending
plans of small manufacturers will likely be revised to
-1.2% (-7.3% in June), while that of small nonmanufacturers
should be revised to -25.0% (-30.8%).
On an all-enterprises basis, spending plans should
be marked up to a modest -0.9% (-2.3% in June).
That said, upward revisions in the plans of small
companies are normal as these firms do not usually
draw up investment plans at the start of the fiscal
year but gradually rachet their spending up as the
year progresses. Although corporate profits continue
to pick up, albeit at a slower pace, global
uncertainties and the strong yen make it hard to
Chart 2: Real Effective Exchange Rate, JPY
(Sep.1985=100)
180
170
160
Average since 1990
Strong yen
150
140
130
120
110
100
90
80
70
Weak yen
60
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
Source: BoJ, BNP Paribas
140
130
120
110
100
90
80
Chart 3: Real Exports (2005=100)
70
04 05 06 07 08 09 10
Source: MOF, BoJ, BNP Paribas
expect businesses to adopt a more aggressive
stance on capex in the near term.
It is widely felt that the yen’s appreciation has made
manufacturers curb domestic investment and focus
more on beefing up/shifting production overseas.
Certainly, that is one reason why investment
continues to recover more slowly than corporate
earnings. But expansion overseas is due more to the
robustness of Asian economies than to the yen’s
strength. Needed structural changes (termination of
unprofitable production lines, shifting overseas etc.)
that should have proceeded gradually were put on
hold by the yen’s super-weak tone in 2006-2007. The
correction of that super-weak tone now is prompting
manufacturers to resume their suspended overseas
expansion plans. Meanwhile, non-manufacturers
have also given greater weight to investing overseas,
especially in the emerging economies of Asia, due to
the strength of overseas sales. Thus, there is little
prospect that capex will become a key growth engine
for a while.
Ryutaro Kono/ Hiroshi Shiraishi 23 September 2010
Market Mover
17
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