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Economy in Brief

Japan's LEI Backs Down in September
by Robert Brusca  November 8, 2021

In September, Japan's LEI backed down, falling to 99.7 from 101.3 in August. August in turn had fallen from 104.1 in July. The June-July readings had marked a high point for the LEI in the Covid recovery period. The weakening in the LEI is also compatible with the fall off in the Markit manufacturing and services gauges in September. They each fell off with the services gauge dropping to 42.9 from 47.3. However, we since then have Markit PMI readings for October. They show a bounce-back as the services gauge rose back to 50.6, its strongest reading since January 2020. Manufacturing rose to 53.2, hitting its highest mark since April of this year.

The LEI paints a mixed picture of economic prospects in Japan. Table 1 shows that the LEI is falling over three months and six months although it is still higher by 7.8% over 12 months. The LEI components the interest rate spread and loan/deposit ratio both point to weaker times ahead (these components lag the LEI by one month). But ‘dwellings started' and the stocks/delivery gauge are still growing although the stock/delivery gauge is also steadily slowing. The export/import comparison is improving over six months and three months and it is also showing acceleration. The international sector is pulling Japan ahead.

Table 1

On balance, the LEI shows a mixed outlook with mixed component performance when we evaluate its momentum.

Table 2 compares the LEI with other economic indicators and gauges. The top portion of the table looks at momentum. Among the percentage changes month-to-month for four gauges (retail sales, exports, employment, and the LEI), there are 12 month-to-month declines in the most recent five monthly changes for those four indicators. That makes performance mixed (only eight out of 20 improve). The three-month changes show declines in three of four metrics with employment as the exception. Over six months, employment and retail sales fall. Over 12 months, only retail sales fall. So, retail sales fall on all three horizons and no indicator rises on all three horizons.

Still, the year-on-year percentage changes for these four metrics shows somewhat better ranking than these results might lead us to expect. Employment and retail sales log year-on-year percent gains that are weak in historic comparison ranking below their 50 mark which puts them below their historic median for change for these two measures. But exports' year-on-year percentage change ranks in the top 19 percentile of all changes since 2007 and the LEI itself ranks in the top 8 percentile with a 91.2 percentile standing.

Levels of achievement
However, in the bottom panel of the table we also look at consumer confidence, the economy watchers index, and the LEI again; this time we assess the LEI as an index level instead of assessing it for its percentage change results. Looking at levels, consumer confidence is on a higher plateau over the last four months than it has been since the virus hit. And it is nearly back to pre-virus levels as well. The economy watchers index has flared high then eased. While it is up month-to-month in September, it is still below its June-July levels. But at its September level it is also back above its pre-covid levels. The LEI level is the weakest it has been since February of this year. However, it is still much higher than its immediate pre-Covid level.

Longer term assessments
When we rank these level gauge readings on data back to 2007, consumer confidence has a 26.3 percentile standing; the economy watchers index is right with it with a 25.6 percentile standing. The LEI rank is better than these with a 59.3 percentile standing. While consumer confidence and the economy watchers gauges are close to the bottom one-quarter of their range, the LEI ranks above its median value and sits at the border of the top 40% of its historic queue of data. That is still only a moderate reading, but it is better than the other two readings that are quite weak.

Table 2

Summing up
On balance, these readings show that the Japanese economy generally ranks better (but still mixed) on data that feature momentum. When we assess its indicators against their long-term values and standings, we find weakness and moderation. However, the look ahead Markit indexes suggest that forward momentum is still in gear for services and for manufacturing, and should produce higher readings for these gauges in the month ahead. There is no denying that no matter how much monetary and fiscal stimulus there has been, Japan continues to struggle to get back to a well-functioning economy with a solid level of activity. Japan trades the most with China, a country that is laboring under energy shortages and virus lockdowns used to enforce a zero tolerance Covid policy. These events are a potent one-two punch that has had the China economy reeling. Japan trades second most with the U.S. where growth and demand have been stronger, but in both instances supply chain problems have driven a wedge between foreign growth and Japan export performance. Also, the chip shortage has hit the important Japan auto sector hard. In sum, Japan continues to struggle.

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