Over the year, Japanese corporations have focused on the slow recovery of domestic demand. But now the low Yen exchange rate and the enormous liquidity that is flowing into the stock market are giving corporations a second wind. So optimism is likely up by 4 points for Large Mfg and 2 points for Large Non-Mfg. This keeps capital investment high while inventory adjustments have likely run their course after Christmas. Basically, Japan is currently driven by what it can do best: exporting and capital investment.

I have been optimistic throughout the year, and there is no reason to be less optimistic now. Consumer demand has continued to recover gradually on higher wages and employment. This trend will likely continue because Japan's non-manufacturing sector has not only increased employment but also greatly improved its profitability, which now matches the long-term levels of the mfg sector. Furthermore, Japanese households have become fundamentally more optimistic because the long reign of deflation has greatly increased the attractiveness not only of Japan's products but of the entire economy in the meantime. For the first time in recent memory, Japan's PPP, or the overall domestic price level, now matches U.S. and European levels, for example.

The outlook for the economy will remain basically unchanged with positive comments on capital spending and a gradual end of consumer price deflation. The BOJ focus on an end of Quantitative Easing is intended to remind the government and the market that this policy is only an emergency measure, which should not be used to drive down the Yen or to produce a liquidity-driven boom in the stock market. It is important to keep in mind that BOJ policy has always had a strong structural policy element. So the BOJ keeps reminding everybody that it will only keep playing ball as long as structural reforms in Japan continue. But the BOJ is not hostile to growth, and remains optimistic about corporate and public restructuring efforts. So it will likely phase out Quantitative Easing as early as April, but will stick to a zero-interest policy throughout next year.

The low Yen rate is still driven by high liquidity in Japan and a more encouraging interest rate environment in the U.S. But investors are waiting to tip the lever. The Tankan is only one positive element in a long line of good news from Japan - the Tankan and the signals for monetary tightening in Asia will therefore remind investors that they have to sttle their carry trades in Yen at some point.