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Economy in Brief

Consumer Confidence Dips and Lags in Japan
by Robert Brusca  January 31, 2022

Japan's consumer confidence diffusion index eroded in January, edging down to 36.6 from December's 38.9. The index is net lower over three months and over six months, but it is up by 6.5 diffusion points over its value of 12-months ago.

A steady dig out in progress but still a weak reading

Since 2018 the current value sits at the 66.5 percentile of its high-low range and, assessed on values since 2002, it is only at its 51.6 percentile standing barely above its range mid-point over that period. The rank standing of the current all household index is at its 17th percentile, much lower reading, and well below, its median when compared to all observations since 2002 (that is the ranking measure in Table 1; for all ranking measures, the historic median occurs at a rank value of 50%).

Consumer confidence is one of the most up-to-date metrics available on Japan's economy. It is presented in diffusion format; values below 50 are poor readings. That result applies to all categories in January 2022 as all show readings below 50. As a separate matter of evaluation at the far right in the table, I calculate percentile of range figures they place this month's value in the range of the highest vs. the lowest observations for a period back to 2018 or 2002 depending on the column. The ranking measure ranks the current observation among all historic values on its timeline back to 2002. The percentile standing data rank the consumer confidence diffusion data they are not diffusion data themselves.

These results do not paint an encouraging picture. One reason might be the spiking Covid infections that are swamping anything Japan has seen in the past. The current peak reading is over three-times the past peak reading. And it is a shock of sorts having come after several months of near zero infections. However, as is the case elsewhere globally, spiking infections have not been accompanied with a correspondingly high death toll. The daily death-toll curve is rising too. But it is less than half the value of the top readings in the last three infection cycles and it also comes after a period in which daily Covid deaths had numbered in single digits across Japan.

Table 1

Not all Japanese indicators are quite so up to date as confidence, but still are quite current. Yet, the ones in Table 2 generally do not tell as devastating a story as the confidence reading/ranking. Evaluated on the same timeline, retail sales have a 63-percentile standing. But employment has only a 12.8 percentile standing and that is going to be very important for consumer confidence. The LEI ranked on year-over-year growth has a solid-to-strong 80th percentile rank standing and ranks about same when ranked in its level. The economy watchers index (another diffusion-type index) has a 99.1 percentile standing – far above that for consumer confidence.

With that as background, we see the overall weak ranking for all the confidence components as 'excessively weak.' Households give the highest ranking to the 'value to their assets' - global stock markets have done relatively well in this Covid/post-Covid period and house values have been strong globally as well. Yet, asset valuation ranks at only its 48.6 percentile, below its median standing for the entire period back to 2002. But the weakest response in the consumer confidence survey is to 'willingness to buy durable goods' at a 12.6 percentile queue standing. Workers also evaluate their overall livelihood at a low level, in the 21st percentile, and income growth is at a 29.3 percentile standing. Employment assessed directly in the confidence survey gets a 28.8 percentile standing. That means that consumers rank employment at a higher relative level than it has actually performed (12.8% ranking of actual job growth). Also, income growth expectations are a bit above the assessment of job growth and stand higher than the quality of overall livelihood. But none of that explains the much weaker 12.6% reading for willingness to buy durable goods. Part of that could be a natural erosion in the propensity to spend as the population ages and Japan's population has aged faster than in any other G7 countries.

Table 2

The virus may be the missing link to understanding these developments; it has swept through and had chilling effects on populations everywhere. The virus is hard to evaluate since different people and different medical authorities seem to view it differently. That is, in fact, because it has some complexity to it. Omicron is much more highly transmissible than Delta, but it is much less prone to kill those who get it or even to cause them to become hospitalized. Compared to Delta, some say it is 'mild.' Yet, it still kills people, and it does create hospitalizations but at a much-reduced proportion compared to earlier Covid strains. Because it can create such large numbers of infected persons, it can still cause local medical facilities to become swamped. Yet, having had it boosts your immunity to it, so immunity is spreading. The future seems brighter since many are saying that the virus has progressed to a point that we can live with it, like the flu and get annual boosters in the cold season just as some do for the flu.

Still, many people fear Covid; they have seen the damage it can do and are unimpressed (apparently, or uninformed) by news of its lesser impact.

This not only makes it difficult to gauge current reactions to the virus, but it makes it hard to project the way forward. That 'way' will depend on if another new variant kicks up and depend on how attitudes toward Covid evolve and that may depend a lot on local health officials and how they view it. For now, WHO continues to refer to Omicron as dangerous and WHO does not like it to be referred to as 'mild' since it is still creating a death toll. And, as an update, there is another new variant that looks like it spreads even faster than Omicron (1.5 time faster according to Dr. Scott Gottlieb on Face the Nation this weekend). However, this newest variant does not seem to be more virulent than Omicron and existing inoculations seem to be just as effective against it as they are against Omicron. So, while it is a 'new variant' it is not a 'game-changer.'

Japan faces a still difficult future. It has not seen the inflation that has arisen in the Europe and to worse extent in the U.S. But Japan continues to have sluggish growth and faces a slowing situation in its major trade partner China and perhaps slower growth ahead in its second largest trade partner, the U.S.- where so far growth has held up quite well. Japan's way forward continues to meet substantial hurdles. For the moment, Japan's consumers and their attitudes are still a problem in need of being solved.

Commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
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