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Economy in Brief

Japan's Economy Watchers Index Is Up in June- A Sawtooth Ride Higher
by Robert Brusca  July 8, 2021

Japan's Economy Watchers Index rose sharply to 47.6 in June from 38.1 in May. At a level below 50, the index still registers an excess of pessimism over optimism. But the 57.0 percentile standing for that gauge tells us that that is better than median response by those surveyed since 2002. Looking at the future index we see a rise to 52.4 from 47.6 that leaves the future with a net positive assessment above the 50 neutral point for the diffusion reading. The queue standing of that index is much stronger at its 85.2 percentile, indicating just how difficult it has been for Japanese survey responders to provide positive assessments.

A new Tokyo Covid-19 of emergency
Even so in the midst of this somewhat upbeat survey, Japan is suffering another real-time setback. PM Suga has delivered a Covid-19 state of emergency for the Tokyo area (PM Suga formally declared on Thursday a state of emergency in Tokyo, putting restrictions aimed at curbing coronavirus infections in place through August 22 (Source here). Japan had already cancelled the running in of the Olympic torch to keep from creating crowds on the street. Now preliminary reporting is suggesting that the Olympics will go on without spectators- a blow to the games. But the games themselves will go on.

Markit PMI gauges largely agree with the economy watchers
Earlier this month the Markit PMI gauges for Japan had indicated a slight tick weaker for manufacturing with a pick-up in services but with the service sector still lagging badly its traditional historic markers. The economy watchers evaluate the service sector a little more robustly in June than does Markit. But the economy watchers sees manufacturing as quite strong with an economy watchers reading of 56.5 which yields a queue ranking of 97.8%. In contrast, services have a 46.3 diffusion reading and a 44.8 percentile standing.

Table 1

Laggards...
Lagging in the current framework are eating and drinking places, housing, the evaluation of the household sector, services in general, and retailing. By comparison for the outlook, only housing has a queue standing below its 50% mark (that means below its median). And only housing and retailing have diffusion measures in the future framework that are below 50, indicating more weakness ahead (even if the readings indicators show less weakness than they did in May).

Table 2

Linking the current with the future
Table 2 presents the current and future indices ranked based on their queue standings. The current and future queue standings have a correlation of 0.43 while their raw diffusion readings are correlated more strongly at 0.56. The diffusion index is the survey's raw up minus down net assessment while the queue standing is an evaluation of the topical diffusion reading by sector compared to its historic performance. One is an absolute assessment; the other is relative. The monthly rankings of the current and future indexes in Table 2 has a 42 percentile rank correlation while the monthly changes in the current and future indexes have a 0.38 correlation. Clearly the two evaluations are related but the surveyed participants see differences in the current vs. the future as well. In other words, relative industry performances can change in the future, but sometimes the factors responsible for the sectors current ranking will linger into the future period as well.

Expectations for change
Manufacturing is rated highly in the current scheme, but it is also highly rated in the future scheme. But services have a weak ranking of 7 in the current framework rising to the top evaluation in the future framework. Services are expected to rebound while manufacturing is expected to sustain its strength. The righthand column calculates the ratio of the future queue standing to the current queue standing. On this scheme, the biggest change is expected for eating and drinking places. The calculation is made off the queue standing data and is large even though eating and drinking places only improve from a rating of 10 to a rating of 7. Services and households also are expected to make large changes in the future. Manufacturers, corporations generally and housing are not expected to see much queue standing change in the future. What is notable about that is that manufacturing and corporations hold their relative strength, but housing does not improve upon its relative weakness.

Summing up
The economy watchers survey is clear in what it sees and expects. But Japan continues to have its bouts of doubt with the virus. And its ongoing application of hair-trigger assessments to turn on restrictions in the crowded metropolitan area of Tokyo leaves that region vulnerable. For that reason, expectations for Japan's future are hard to form with any degree of confidence.

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