Japan's Economy Watchers Index Is Slammed in January

Japan's economy watchers index for January fell sharply with the current index falling from 57.5 in December to 37.9 in January. The future index fell as well, shedding its 50.3 reading in December in return for 42.5 in January. The current index fell month-to-month by 19.6 points while the future index fell by 7.8 points. On the face of it, the current index fell more sharply. But on closer inspection, it didn't. Ranking all month-to-month changes in the current and the future headline indexes over the last 100 months puts the monthly change for the current index in its lower 38th percentile- it falls more than this month to month about 38% of the time. However, for the future index, a drop of 7.8 points month-to-month or more occurs only about 14% of the time. So, the drop in the future index is actually rarer and shaper when compared to historic tendencies. Japan's economy watchers have not only discounted current performance but have done so with a significantly darker view of the future. This is not a one-off decline that takes the current reading lower but envisions a relatively quick rebound. It is something much darker.

Apart from the month's changes, the standing of the current index is now quite low, in the lower 13th percentile of its historic range of values; the future index is a slightly stronger at its 20th percentile. In the current array of standings, corporate manufacturers have the strongest percentile rankings followed by nonmanufacturing corporations with the overall employment ranking coming next. Corporations generally fare better than business by specific industry. This suggests that smaller businesses may be seeing more weakness.

As for the outlook, corporations involved in manufacturing are strongest by a large margin followed by assessments of employment and, after that, expectations for eating and drinking places. This ranking is quite different than for the current rankings.

The eating & drinking places ranking switch- and by that I refer to the industry being the weakest current assessment and yet the fourth strongest assessment in the future profile- looks like a classic response for a period in which Covid has struck depressing current conditions but not denting the expectations for the future by as much. And indeed, eating & drinking places have lost 42.2 diffusion points of value in the current index over last three months shedding 40 of them in January alone. Meanwhile, the future reading fell by about seven points month-to-month but has lost 17 points over three-months. Services lost about 30 points month-to-month in the current reading and 9 points in the future reading. Services lost 28.8 points over three-months in the current framework compared to 18.6 points in the future. But unlike eating & drinking places, services rank 9th in the current index setting and even weaker at 10th in the future setting. By ‘ranking' I refer not to ranking the raw diffusion reading values, but to ranking the components again on their queue standings (or timeseries ranking) presented in the last column of the table. Each industry should be ranked relative to its own historic experience. Diffusion value levels cannot be directly compared and even changes month-to-month need some perspective (as we saw at the top of this report).

On balance, we see that Japan's economy watchers index is weak in January. It shows some elements of a Covid strike (weak current reading with less weakness in the future); at least there is that effect on display for eating & drinking places (it is unique among sectors in that regard). And there is some resilience for manufacturing, for corporations generally and for the current situation as well as for the evaluation of employment. But the service sector broadly shows more concern about the future. Japan, like everyone else, has worries about the Covid virus, but its concerns about the future appear to be more deeply seated.