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Economy in Brief

Japan's Economy Watchers Index in Significant Pullback
by Robert Brusca  September 8, 2021

Japan's economy watchers index pulls back in August with decelerations in all sectors under the current conditions assessment. Out of ten readings including headline and some sector overlapping, FIVE show pullbacks for two months in a row. Only housing shows pullbacks for three-months in a row.

The future index shows a pullback in all indexes except housing (it seems that the assessment is that what has been weaker will become strong…). All future components that pulled back in August also pull back in July, once again with housing as the lone sector that shows an increase month-to-month. However, in June all sectors showed improvement.

Based on the monthly data, the economy watchers index is throwing off very similar signals for the current and the future readings. However, the diffusion index changes over three months and six months are for the most part very different between the current and future indexes. The changes in two assessments, however, is a little more uniform given time to breathe and measured over 12 months.

Over three months, all 10 current and future categories show declines. However, the declines represent a worsening in the pace of decline (converted to an annual rate) for six elements in the current assessment including the headline. That compares to six for the future assessment, but not the same six. As a result, the simple correlation between the three-month current changes in diffusion and the three-month future changes in diffusion is essentially zero.

Comparing changes in diffusion over six months shows declines in all categories in both the current and future habitats. Only housing in the current period did not decelerate compared to its 12-month annualized pace. The correlation between the six-month changes in the current and future habitats across components is 0.48. Changes over three months are largely unrelated while changes over six months have something in common.

Over 12 months compared to the year before, changes in diffusion between the current and future gauges have a correlation across components of 0.76, a relatively high correlation. Compared to a year ago, four components are weaker in the current gauge and so is the overall current index. For the future gauge, only two components are weaker and the future gauge itself is higher. In addition, six current components are weaker over 12 months than they were a year ago. For the future gauge, four are weaker than they were over the previous 12-months and one sector is unchanged. These four weaker and one unchanged future readings are in the same industries as four of the five weakening in the current index, enhancing their positive correlation.

Setting aside the path that the various gauges took to get to their values in August, a separate question is: how similar are the queue standings for the current and future assessments? The simple correlation across the queue standings yields a correlation of 0.75 which is quite solid. It means that the relative position of the components in the current and future indexes have a lot in common. The correlations on the raw queue standings are higher than the correlations calculated on the sector rankings; the ranking of the two gauges produces a rank correlation at 0.61. The current standings are usually lower than the future standings as well.

Both the current and future readings rank manufacturing as number one and housing as number two. But the current index ranks employment at number 3 (#9 in the future scheme) while the future index ranks corporations as number 3 (they rank as #4 in the current framework)

Ranking for the lowest in the two-time horizons are even more different: for the current scheme 10th ranked is eating and drinking, 9th ranked is services and 8th ranked is the total gauge. For the future index 10th ranked is services, 9th ranked is employment and 8th ranked is households.

We can also take out the microscope and look as these current-future correlations month by month Since December 2020, services and eating & drinking places future-current correlations have dropped steadily. Also dropping steadily but by less is the household and retail future-to-current correlation. This separation generally has meant that as the current reading has weakened the future reading has improved.

The total correlation between the current and future indexes has been more or less steady over various periods from February 2020 to date, since the virus struck.

All of this points to expectations for a better future across the board, but it just has not been happening. Between the virus and Japan's other problems, the failure of the Olympics to spur any enthusiasm and instead to spark criticism has left Japan is a difficult spot politically and from the standpoint of making policy. Japan has relied on monetary accommodation for some time. It has been a virtual study in fiscal overreach. With demographics pulling it down, Japan is depending on the international sector to provide a needed boost. But for now the virus seems to be more of an adverse problem in Asia than in the West so Japan may have to continue to bide its time before conditions will substantially improve.

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