Business conditions to confirm a firm recovery in Japanese economy

Japan's current business condition diffusion index (DI) for large manufacturers is likely to improve to +14 in Q2 from +12 in Q1. After rising to +17 in Q1 2014 due to the temporary increase in consumption ahead of the consumption tax (CT) hike in April 2014, it remained at around +12 for four consecutive quarters. 

Considering that the CT hike was decided before PM Abe's administration took office and the bad timing as it was implemented before Japan's exit from deflation, the economy managed to tolerate the downward pressure from the tax hike and luckily avoided a collapse in corporate sentiment.       
Q1 real GDP growth was +3.9% qoq annualised, confirming a second consecutive quarter of positive growth. Thus, after falling into a technical recession following the CT hike, the Japanese economy has indeed recovered growth. The contribution of inventory investment to Q1 real GDP growth was very strong. 

"The BoJ is likely to wait patiently until it confirms the rebound of inflation in Q3. However, in October, the BoJ is likely to realise that the rebound in CPI is still weak and the Bank is likely to respond with additional QQE measures", says SocGen.
According to Societe Generale, the current business diffusion index for large non-manufacturers is expected to improve further to +22 in Q2 from +19 in Q1. The depreciation of yen has progressed further and is putting downward pressure on corporate sentiment for non-manufacturers, as it will increase import costs.

As the recovery in consumption remains moderate, non-manufacturers are still feeling uncertain about consumption growth ahead. However, as indicated by the Shunto (spring labour talks) result, a wage increase is now confirmed.