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Economy in Brief

Japan's Sector Indices Show Little Activity
by Robert Brusca  October 13, 2016

Japan continues as if cursed with a similar travail to that of Sisyphus. He was condemned to have to roll a huge boulder up a hill only to see it roll back over him to sit the floor of the hill so he was forever to commit the same herculean act daily and never had anything to show for it nor any prospect for success. While Governor Kuroda expresses confidence in BOJ polices, Japan's data continue to show very little evidence of any progress. And Kuroda continues to throw new policy moves at the economy. Japan's policy moves come against a background of an already huge pile of debt and population that is shrinking. The slope of the hill that Japan must push the boulder up is steep and unrelenting.

The Tertiary Index
Japan's tertiary index (service sector index) released overnight was flat in August at its July level. In July it had risen to 104.1 from June's 103.9. Its level reflects a searing growth rate of 0.5% over 12 months (sarcasm). Still, the sector has been making some progress. The level of the index stands in the 96.7 percentile of its historic range. Since the services sector must grow to augment GDP, the level of the index being high is less impressive than its ranking makes it sound. This index needs to grow to make a contribution to the economy and its year-on-year gain is an anorexic 0.5%.

The Industrial Sector
The industry index rose a sharper 1.4 points in August to stand at 97.9 and at the 50.5 percentile of its historic queue. The manufacturing index is more volatile than the services index. And it is moving up but still at a lower relative position than services. There is also a Markit manufacturing sector gauge; that index is a diffusion index. Its reading puts Japan's diffusion index at 49.5, implying that manufacturing is still shrinking even the index has improved month-to month. In the diffusion framework, manufacturing seems even weaker since its diffusion reading of 49.5 leaves it at the 26th percentile of its historic queue of data. There is also a Teikoku set of indices. In that framework, in August the manufacturing sector slips month-to-month but has a 61st percentile standing in its queue of historic data. The Teikoku and Markit indices should be somewhat more similar since they both derive from a diffusion reading. Yet, their diffusion readings are quite different and the standings of those diffusion readings in their respective queues are even more different. But then again neither of them is strong: one has a moderate standing and the other is weak.

Teikoku Service Sector Readings
The Teikoku service sector reading finds slight slippage in August and a ranking in the 65.6 percentile. The diffusion ranking is akin to a ranking on a growth rate (in some sense) so it is not surprising that it is lower than the reading of the tertiary index level. At a 65th percentile standing, however, the signal is still that services are only plodding along which is what the tertiary index's own 0.5% growth rate also tells us. The other Teikoku sector readings for retail wholesale and construction are also middling readings that reflect rankings in the range from the 57th percentile to the 63rd percentile, a zone of moderation and much less than what Japan will need to boost it to an improved position.

The Economy Watchers Index
The table also contains the economy watchers index which is another way of looking at the services sector. It is also uses a diffusion approach. The economy watchers index sees some slight improvement in services and in service sector employment month-to-month, but the overall index is below 50 and that signals sector contraction. The overall index has a rank in its 48th percentile (weaker than Teikoku standing) with service sector employment at a 43rd percentile standing and a raw diffusion reading of 52 for employment. There is also a future index. The future diffusion index improved slightly on the month and its outlook standing is in its 52nd percentile. So while the raw diffusion reading for the outlook is also below 50 (47.4), indicating that future conditions are still expected to erode, that reading itself is slightly better than it has been historically (since 2008) since it stands above it median (its ranking is above 50).

When assorted measures are used, assorted answers are obtained
There is danger in trying to assess an economy with several different gauges for the same sector as we can see from the discussions above. But nowhere in those discussions is the services sector or manufacturing sector deemed strong. They grade out as stagnant or moderate or slightly disappointing. While we can argue about exactly where on these scales the Japanese sectors belong, the message is clear. Policy is not getting traction to move these sectors up enough on any growth gauge. Maybe policy needs more time to work or maybe it will just continue to be ineffective. But so far there is little reason for much optimism. The LEI gauge also contained in the table sort of fuses all the sectors together into a single reading. The LEI did make a slight improvement on the month, but it still only stands in the 51st percentile of its historic queue, just a smidgeon above its historic median.

The China Card
Of course, Japan is also in China's shadow these days and China's shadow is getting longer and darker. Chinese exports fell by 10% in the month of September with imports backtracking as well. An export drop of about 3.5% had been expected. Since Japan does most of its trading with China, this is not a good development. Japan also trades a lot with the U.S., but U.S. growth has been moderate-to-weak and its imports have been weak. Japan is not going to find any help to lift its growth in the international sector.

China's Impact on the US Outlook and Policy Posture
I wonder if the sharp drop off in China's trade flows is causing anyone at the Fed to rethink the quality of the international backdrop for a possible Fed rate hike? Just a random thought here... It seems that the Fed may have (once again) prematurely declared the international sector healthy enough to be ignored by U.S. policymakers and it now seems that such judgement again is off track. The Fed has really been clueless about the role and importance of the international economy. Occasionally Fed governor Lael Brainard has offered up some real insight. The Fed as whole seems to have been quick to either ignore that as a body or to assume that whatever conditions Brainard identified have quickly been dispatched and are no longer relevant to U.S. policymaking. The Fed seems to long for the 'Good Old Days' when the U.S. economy dominated the world and policy disturbances were localized and the TV show 'Leave It to Beaver' was still on the air.

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