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Economy in Brief

Japan's Service Sector Shows Solid June Gain But Fails to Impress
by Robert Brusca  August 17, 2021

Japan's Tertiary index: Japan's METI tertiary index (service sector) rose sharply to 97.2 in June from 95.0 in May. However, the rebound did not restore the index even to its April value (of 97.8). The service sector showed very strong results for March and April of this year, but that performance fell away in May. The June reading brings the service sector assessment up to standing at a level roughly comparable to the sorts of readings that were posted from August 2020 through February 2021. It is still not a very solid portrayal of the sector's performance. The index level in June ranks only in its 13.3 percentile on data back to 2009. Since this is not a diffusion index but a raw index that will grow unbounded over time, this is a very weak result. However, it may not be as dire as it seems since Japan also has a shrinking population, a factor that takes growth away from these sorts of indexes. The tertiary index does have a strong 94.4 percentile standing on its growth rate over the past year; that compares it historically to all previous 12-month growth rates since 2009. That strong ranking is a good sign. Yet, going back to January 2020, the tertiary index is still not back to its pre-covid level of activity. It has fallen 7.8% over 17 months. Clearly the high 12-month rates of growth reflect make-up gains and make-up that is not yet gotten activity back to square one.

The Industry index: By comparison, the METI industry index is up by a skinny 0.5% since January 2020. Its index level rank on data back to 2009 is in the lower 35 percentile of its queue of data. The industrial sector has a 12-month growth queue standing in its 97.2 percentile and the raw index is the second highest reading in the last 12 months. Still, the index is barely above the January 2020 level indicating that Japan's economy in terms of its industrial sector and its service sector (the bulk of the economy) has not been very robust over the last year and one-half, despite some impressive recent 12-month growth rates.

The LEI is strong: The table also presents the LEI, an indicator that grows without bound over time. The LEI was up sharply in June, rising to 104.1 from May's 102.6. The rank standing on its level is more acceptable at 92.3 percentile. The LEI is up by 15.4% from its level in January 2020. Its growth rank on growth over the last 12 months is a strong 95.1 percentile.

The LEI is neither fish nor fowl: The LEI seems to show more resilience than either the tertiary sector or the industrial gauge and certainly it seems to be stronger than the confluence of those two indicators. But the LEI is also comprised of forward-looking elements.

Teikoku readings are weak: The Teikoku indexes that give readings across sectors from manufacturing to construction to services, retailing and wholesaling, show pronounced weakness. Of these five Teikoku readings, only the manufacturing reading is higher in June than in January 2020. The percentile rankings of the indexes' levels all are below their respective medians (below a value of 50) with manufacturing the relative strongest having a standing in its 48.3 percentile and with retailing the weakest at a standing just below its 30th percentile. As diffusion indexes, the raw values for all sectors are persistently showing below 50 implying that activity continues to slow. However, the 12-month growth rankings back to 2009 are in their 80th to 90th percentile for all readings except construction; that sector registers only a 66th percentile standing. Recently growth has been strong, but then again, we have a good idea why that is. March to June of this year the Teikoku readings have not changed by much; they did show gains in June compared to May. There seems to be very little momentum here despite strong 12-month growth rankings.

Economy Watchers offers two views: Teikoku and the Economy Watchers indexes are diffusion indexes so they are bounded top and bottom. The economy watchers ‘take' on things is that all sectors are up from January 2020 except for eating & drinking places, a notorious laggard in this virus-afflicted period. The future index shows some optimism rising by 26.6% from its January 2020 level while the employment module is up by 42.4% on that timeline. The comparable index rankings on the level of these diffusion indexes is still higher than for Teikoku. The overall ranking on the Economy Watchers index level is at the 55th percentile, much weaker than the gain seen by the LEI. Retailing garners a 42.7 percentile standing (better than Teikoku). Services at a 43.4 percentile standing is about ten diffusion points better than Teikoku. But the eating and drinking places level is a very weak 14th percentile. The strongest Economy Watchers readings are for employment (69.2 percentile) and for the future index at an 87.4 percentile standing; the latter reading is more comparable to the ‘forward-looking' LEI ranking previously presented. Growth rankings over the last 12 months of growth are generally weaker and much weaker for the Economy Watchers index compared to the other similar assessments in the table.

Summing up disparate sums
On balance, it is hard to find metrics that see all sectors the same way. But there is a pretty clear vision that most of Japan remains historically weak, most of it has not recovered well in the post-virus period, But there is a better record on recent (last 12-month) growth. However, that pick up had the benefit of a tailwind, the clobbering that growth took in the early months of the virus. With lockdowns still in place in Japan in the wake of the Olympics, Japan does not seem poised to pick up.

Growth and sputter...
Japan seems to be a picture of the same-old, same-old, as growth continues to struggle and sputter. As to the future, the LEI has a more positive take on things. The actual employment metric from the Economy Watchers shows more strength than the various industry assessments. And the future index from the Economy Watchers is positive in the firm-to-strong range.

The future with the virus loose in Asia
But the Delta variant has sent up warning signs everywhere. New Zealand just launched a lockdown after a single suspected case was identified. Australia is in the midst of a huge problem with lockdowns being reinforced using roadblocks. China has a wave of reinfection. Japan's new cases are low by global standards, but they are high compared to what had come before in Japan; the deaths curve, while still quite muted, is inching up. It is hard in this environment - with much of Asia struggling - to get too upbeat on prospects for Japan.

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