Why oil shipping stocks don’t really follow Japanese activity anymore
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The Tankan survey
Aside from the United States, Japan produces several economic indicators that are well recognized worldwide—one of which is the Tankan survey. Part of the Tankan survey collects data on whether business managers believe the economy will improve or decline. When business conditions increase, the survey often points to an improving macro environment.
Business Confidence Index
For the second quarter of 2013, business confidence among medium and large manufacturing enterprises in Japan rose to -3% and 10% respectively, as reported by Bank of Japan on July 1. It’s important to note that the percentage doesn’t indicate change from the previous months or years. The confidence index is calculated as the percentage of respondents who believe the business outlook will improve minus those who believe the outlook will worsen. Historically, economic improvements have followed rising business confidence.
Japanese markets have rallied since mid last year, as the government rolled out monetary stimulus, bringing the yen down from ~77 to 100 per dollar, and pledged a stimulus package of ~$224 billion in fiscal, local, and private spending on January 11, 2013. Although critics and skeptics have pointed out that a large portion of the stimulus was already planned for Japan (the country has been spending roughly three times the current package since 1998)1, economic conditions generally improve when the government steps on the stimulus paddle. Because the lower yen makes Japanese goods cheaper for other countries, demand for Japanese products will rise—and so will revenues and profitability. As a result, businesses are becoming more optimistic with the country’s near-term economic prospects.
Past and future opportunities
In the past, Japan’s economic activity has supported shipping companies. After all, Japan has the third largest GDP (gross domestic product, or overall economy) in the world, heavily reliant on manufacturing and exports, and Japan is one of the top ten countries by trade volume. The fact that China is Japan’s largest trading partner means that positive growth in Japan often suggests positive growth in China. Since China is the largest importer of raw materials, Japan’s growth will benefit shipping companies. However, current conditions are slightly different because the weakening of the yen primarily benefits Japan. This means Japan’s data will correlate less with tanker stocks such as Teekay Corp. (TK), Tsakos Energy Navigation Ltd. (TNP), Ship Finance International Ltd. (SFL), Nordic American Tankers Ltd. (NAT), and Teekay Tankers Ltd. (TNK) over the medium term. On the other hand, Japan’s growth may support the Guggenheim Shipping ETF (SEA), because some of its company holdings are located in Japan, which means if these holdings are doing well, they may support the ETF’s share price.
See how China is doing on our Macro Trends page.