Japan’s current business condition diffusion index (DI) for large manufacturers remained unchanged at +12 (consensus was +14) in Q1. After a strong business condition DI in Q1 2014 (+17) when last-minute demand ahead of the consumption tax (CT) hike in April 2014 pushed the index up, the DI has remained almost unchanged at around +12 for three consecutive quarters.This implies that large manufacturers have managed to survive the difficult time when the downside pressure on the economy was strong after the CT hike, and avoided a large drop in business sentiment.The DI outlook for large manufacturers in Q2 2015 remains weak at +10, but it indicates a slight improvement in business from the previous Tankan (the outlook DI as of Q1 2015 for large manufacturers was +9). Inventory adjustment following the consumption tax hike in April 2014 had been a negative factor for the economy, but the adjustment is now over.Additional QQE measures taken by the BoJ is pushing up the USD/JPY exchange rate as well as the domestic equity market. A recovery in export volume as well as in production is now clearly visible. The average of predicted FX rates by large manufacturers in the Q1 Tankan survey indicated a USD/JPY 111.81 exchange rate for FY15 (which started 1 April). This implies that yen depreciation will help push up corporate profit further.“We expect thatthe business condition DI for large manufacturers will be revised up again in Q2, exceeding +12 on the back of economic recovery in the US and an expansion of domestic demandthanks to wage increases. Thus, an uptrend in this DI is likely to be confirmed in Q2”, Said Societe Generale in a report on Wednesday

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