Economy in Brief: April 2022

Japan's Tankan report slipped in the first quarter of 2022 as the bellwether manufacturing rating fell to 14.0 from 17.0 in the fourth quarter of 2021. Nonmanufacturing slipped to 9.0 from 10.0. On the same timeframe, the total industry reading fell to 11 in Q1 2022 from 14 in Q4 2021.

Weak levels for the Tankan The absolute level of the readings for Q1 2022 are not particularly solid. For manufacturing, the percentile queue standing is at 66.7% that leaves it at the border of the top third of its queue of values- that's a reasonably firm, but not very impressive standing. For nonmanufacturing, things are much worse. The nonmanufacturing percentile standing is at its 39.4 percentile, leaving it substantially below its median. The median occurs at a ranking of 50%. Together these two measures leave the total industry percentile standing at the 43.9 percentile, also significantly below its historic median.

Lost momentum, turned negative, too The Japanese economy has slipped. The levels of the Tankan are not impressive and perhaps even somewhat disturbing to the policy officials there. A look at the sequential pattern in the table shows that there has been weakening; there's a weakening from Q3 to Q4 from Q4 2021 to Q1 2022, although the first quarter readings for 2022 stands above or at the same level as they did in Q2 2021.

An uneven set of readings and their impact On balance, the Tankan gives us a view of the Japanese economy that shows it slipping. It has already reached levels that are not very strong by the standards of the Tankan survey. At the same time, the Bank of Japan is struggling to keep control of interest rates and the yen has backtracked significantly on foreign exchange markets. The drop in the yen is a mixed blessing as a weaker yen makes Japanese goods cheaper overseas and that provides export stimulus for the economy. However, Japan has shuttered its nuclear reactors now and is importing a great deal of oil; oil is priced in dollar terms. Any weakness in the yen is going to make Japan's energy imports even more expensive at a time that energy is already very expensive. In addition to that, anything that Japan imports from the dollar sector is now going to be more expensive.

The final column in the Tankan table shows changes in the indexes from Q1 2020. Manufacturing is up by 22 points on this timeline but nonmanufacturing is up by only one point. Total industry is up by 11 points on this timeframe benchmarked to just before the start of Covid globally.

Services industries Turning to the details in this report, looking across various service sector industries, only wholesaling has increased its assessment quarter-to-quarter moving to a value of 20 in Q1 2022 from 17.0 in Q4 2021. The transportation rating at -2 is equal to its reading in Q4 2021. Comparing the levels of the readings to their values in Q1 2021, we see that most of the industry responses are higher: construction and real estate are exceptions. If we look at the queue percentile standings, in Q1 2022, we get a glimpse of the kinds of businesses that have been hurt the most in the post COVID period. Restaurants & hotels and personal services scrape the bottom of the barrel with lower 10 percentile or weaker standings. Also extremely weak is transportation at a 31.8 percentile standing and retailing at a 36.4 percentile standing, along with real estate at its 37.9 percentile standing. Construction is only slightly better off at a 47 percentile standing, but it is still below its historic median. Showing some strength are services for businesses at an 87.9 percentile standing; wholesaling registers an 81.8 percentile standing. These are relatively strong readings indicating some degree of health in those sectors.

The far-right hand column shows the changes in these sectors since Q1 2020; there is an outsized increase in wholesaling of 27 points, retailing improved by 9 points, transportation improved by 5 points, and services for businesses improved by 3 points along with restaurants & hotels. However, personal services, real estate, and construction are all lower on that timeline comparison with their assessments of two years ago.

Outlook darkens The outlook portion of the survey weakened sharply quarter-to-quarter. The manufacturing outlook slipped to 9 in Q2 2022 from 13 in Q1 2022; the nonmanufacturing outlook slipped to 7 from a reading of 9; and for overall industry, the outlook stands at a value of 8 compared to 10. The queue percentile standing for these readings put the manufacturing outlook at its 56.1 percentile standing, slightly above its historic median. For nonmanufacturing, the 37.9 percentile standing leaves it well below its historic median; the all-industry standing is at its 42.4%, also below its historic median. If we compare the manufacturing outlook for Q2 2022 to the outlook for Q3 2021, it's lower significantly and the outlook for all industry is unchanged with the nonmanufacturing outlook being the only one that has improved on that timeline.

In summary, there's a lot of weakness in the Tankan report. There's a loss of momentum, there's weakness across the board, there's a loss of momentum across the board, and there's a reduced outlook for the period ahead. Japan's policymakers are looking at the potential for a fiscal stimulus package which makes a lot of sense given this weak report. Japan's economy continues to struggle.