Activity Tapers off in Japan

There are not too many different ways to look at the ongoing weakness in Japan. All sectors are weakening and in all cases the drop off has been relatively severe. The headline index stands only in the 33rd percentile of its historic queue of data, a very weak position. The construction sector stands in the 21st percentile of its queue. Mining and manufacturing stand in the 36th percentile. Only the tertiary sector, services, stands above the 50th percentile mark. That tells you something, since services are usually a pay as you go proposition. You cannot stockpile services. The weakness in Japan's economy now is mostly about hoarding.

Japan's economy is in a peculiar short-term boom-bust cycle; this is the bust phase. The economy boomed ahead of the imposition of the sales tax as everyone bought ahead everything that they could to avoid the tax. Now, in the aftermath of the tax, activity is much weaker as people live off of their pre-purchases. The leading index released today also was weak as it sees the same forces in play.

But weak is not glum. The monthly Tankan survey, run by Reuters, showed that business confidence is still solid. Japanese businesses have seen these tax-related boom-bust cycles before. They know that as bad as it seems, it is temporary and that activity will come back.

Business confidence is not misplaced; it just has perspective. So these irregularities in activity do not tell the real story of what is happening in Japan. The very strong GDP growth in Q1 was not real and neither will be the weakness of Q2. Japanese businesses are expecting to get through to the period when pre-sales can no longer carry the consumer and see activity pick up again. Businesses remain patient and optimistic in Japan.