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Economy in Brief

Japanese Economy Watchers See Improvement In Current Conditions, But Deterioration In Future Conditions
by Louise Curley April 8, 2008

Economy watchers in Japan are people who hold jobs that enable them to gauge present conditions and future prospects in their respective lines of business. Since 2001, there have been some 2050 watchers reporting to the Cabinet Office. The Cabinet Office presents the results of the surveys in the form of diffusion indexes.

The Economy Watchers diffusion index for current conditions rose for the second month reaching 36.9 in March from 33.6 in February and 31.8 in January. The diffusion index for future conditions, however, fell in March to 38.2, after showing the first rise in 9 months in February. The indexes of both current and future conditions can be seen in the first chart.

Expectations of lower future conditions were registered in every category except for retail sales where the diffusion index rose by a tenth of a percentage point. There are close correlations among the diffusion indexes of the various categories relating to current and future conditions. For example, the correlation between the indexes of future conditions for households and corporations is .94, as seen in the second chart. Similar high correlations are present in other combinations which suggests that all the Economy Watchers in the various lines of business have similar appraisals of current and future conditions.

As an indicator of trends in the whole economy, the Economy Watchers diffusion index of future conditions does not appear to be a particularly good forecaster. The final chart shows the quarterly changes in the diffusion index of future conditions and in GDP and the correlation (R) between the two series. The R2 which measures the degree to which the change in the GDP is accounted for by the change in the diffusion index is only 12%.

JAPAN:  ECONOMY WATCHERS SURVEY (Diffusion Indexes)  Mar 08 Feb  08  Mar 07  M/M Chg  Y/Y Chg  2007 2006 2005
Current Conditions
 Total   36.9 33.6 50.8 9.87 -27.36 44.9 51.4 50.3
  Households  37.4 33.1 79.9 12.99 -25.05 44.0 49.8 49.0
  Corporations 36.0 34.4 50.7 4.65 -29.27 45.1 51.8 50.5
   Manufacturing  35.5 34.5 48.7 2.90 -27.10 44.6 50.1 48.8
   Non Manufacturing 36.2 34.3 52.7 5.54 -31.31 45.4 53.6 52.2
Future Conditions
 Total   38.2 39.5 51.3 -3.29 -25.54 46.9 52.9 51.5
  Households  38.8 39.6 51.6 -2.02 -24.81 46.6 52.5 50.9
  Corporations 36.1 38.6 47.9 -6.48 -24.63 45.8 51.7 50.6
   Manufacturing  36.8 39.6 47.2 -7.07 -22.03 45.2 50.6 49.2
   Non Manufacturing 35.2 37.4 48.6 -5.88 -27.57 46.4 52.9 52.1
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