The Short-Term Survey of Economic Conditions (known in Japanese
as tankan), is an enormous statistical survey that the Bank of
Japan carries out quarterly. The survey is conducted to provide an accurate
picture of business trends of companies in Japan to help the BoJ in carrying
out monetary policy. It is arguably the most important economic statistic that
comes out of Japan and is closely watched by all financial markets.
The judgment survey is the most closely watched. In this part of
the survey, companies are asked about 13 different aspects of their business,
such as “business conditions,” “production capacity,” and “lending attitude of
financial institutions.” They are given three possible responses and asked to
choose the one that best describes conditions now as well as the conditions
they expect in three months. The alternatives are usually something like “1)
good, 2) not so good, or 3) bad.” For example, for “business conditions,” the
alternatives are “favorable,” “not so favorable,” and “unfavorable.” For
production capacity, they are “excess capacity,” “adequate capacity,” and “insufficient
capacity.” For lending attitudes, they are “accommodative,” “not so severe,”
and “severe.”
The BoJ then calculates a diffusion index (DI) by taking
the percentage of companies that choose #1 (good, favorable, accommodative,
etc.) minus the percent that choose #3 (bad, unfavorable, severe, etc.). The
higher the number, the better things are, although in some instances, such as
production capacity, a lot of excess capacity is not good for the economy.
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