Japan's LEI Waffles Sideways-Sets a Weak Path

Japan's leading economic index for June was at 100.9, down slightly from May's value of 101.2. The index has been waffling and in a sideways motion (see Chart) since early-2021. The growth rates show a 12-month growth rate of minus 2.5%, a six-month annualized decline of 3.8%, and a three-month annualized increase of 0.4%. Over 24 months, there's an increase of 21.9%- not annualized.

The LEI report still has two components missing for June, the loan/deposit ratio change and the normalized overtime in manufacturing metric. Only four of the six components are up to date in June. While they call this statistic a 'leading indicator,' it is working off data from May and June and here we are just a few days from September.

Monthly changes Share prices moved slightly lower in June compared to May, falling by a skinny one tenth of a percentage point. The interest rate spread was unchanged in June holding at 100.2. The dwellings-started metric is also unchanged at 100.3. The export-import balance shows a slight improvement to 99.9 in June from 99.8 in May. The April to May shift in the two lagging components finds the loan-to-deposit ratio a tick higher and manufacturing OT (overtime) unchanged.

Overall, the LEI and its components paint a picture of a Japanese economy that is very little changed on several of fronts. The biggest change in the economy has been the ongoing decline in the yen because of monetary policy in the United States. U.S. monetary policy has been moving rates up sharply and progressively; that has had a substantial impact on the dollar that has been moving up against all major world currencies especially against the yen and the euro. At some point, Japan should reap some benefits in terms of export growth although it's going to cost Japan in terms of import prices and that becomes more of a problem because as Japan does import a lot of energy that is priced in world markets in dollar terms. However, Japan is taking steps to revive its previously mothballed nuclear facilities to reduce its dependence on imported hydrocarbons.

Trends Looking at the trends across the components of the leading economic index, among the six components, three of them show increases and three of them show declines over three months. Two of the indexes showing increases over three months are the lagging metrics; only one of the topical indexes shows an increase; i.e., the export-import balance. Over three months, share prices are down at a 0.8% annual rate, the interest rate spread is down at a 0.2% rate, and dwelling-starts are declining at a 0.5% annual rate. The two lagging indicators show little change over three months in May. The loan/deposit ratio is up by 0.4% annualized over three months while the OT gauge (overtime) for manufacturing is up at a 0.2% pace.

Over six months, only one of the components declines and that is share prices. However, the interest rate spread and dwellings have very small 0.1% to 0.2% increases. The export-import balance index improves by 0.5% while the lagging loan/deposit index is up at a 0.7% pace and manufacturing OT is up at a 1.3% pace.

Over 12 months, share prices decline by 0.7%; all other metrics show improvement.

The net change over 24 months reveals declines in the loan/deposit ratio and in the export-import balance. The lagging manufacturing OT is up by a strong 3.7% with a 1.4% rise in dwellings-started, a 0.8% improvement in share prices, and a one tick rise in the interest rate spread.

LEI vs. Confidence Comparing the LEI to the consumer confidence readings, we find that consumer confidence also fell in June. And it also declined over 12 months, six months and three months. The LEI and consumer confidence measures demonstrate shared weakness over the last year. Yet, both are up strongly over 24 months, by 10.3% for confidence and by 21.9% for the LEI.

Summing up The LEI and confidence measures continue to point to issues and concerns about prospects for Japan's growth. Consumers are still struggling to rebuild confidence levels while the leading index is mostly weaker with a feeble gain over three months. Japan could see growth helped by the weakening yen. However, there are countervailing forces as well; rising interest rates in the U.S. and in Europe and the fact that China, Japan's largest rate partner, is still pursuing a zero-Covid policy. Those factors continue to weigh on the outlook.