The Tankan‘s big manufacturer index slipped to 12 in December from 13 in September, lower than the median forecast of 13 polled by Bloomberg. In the outlook for next March, the Tankan Index was forecast to worsen to +9.

Japan’s large manufacturers based their capital expenditure and business operations plans on the assumption that the yen would average 103.36 per dollar in the current fiscal year, even though the Japanese yen has been trending at around 117-118. Given the cautious stance of Japan’s large manufacturers, the biggest beneficiaries from a weaker yen, “it is becoming more difficult to sense the additional merits of JPY depreciation,” according to Barclays analysts Kyohei Morita and Yuichiro Nagai.

The Japanese manufacturers may not feel a weaker yen is here to stay and are adjusting conservatively their capital expenditure plans. According to the Bank of Japan survey, capex plans of large companies as a whole were revised - just slightly – up from September’s 8.6% to December’s 8.9%. Not surprisingly, the output price index rose only slightly to -3 from September’s -4. “Inflation expectations appear to remain muted with the decline in oil prices,” observed Barclays.

This is not good news for Bank of Japan, which is conducting a massive quantitative easing policy to shock the Japanese economy back into inflation, nor positive for Prime Minister Shinzo Abe, whose Abenomics needs improving business sentiments.

The Nikkei 225 fell 1.3% this morning with the yen recently trading at 118.57 per dollar. Big exporters slumped. Mazda Motor (7261.Japan) retreated 3.7%, Olympus (7733.Japan) fell 2.8%, Toyota Motor (TM) dropped 2%. On Friday, the iShares MSCI Japan ETF (EWJ) fell 1% and the ProShares UltraShort Yen Fund (YCS) dropped 0.7%.

Barron's (blog)