Household Confidence in Japan Weakens, but Still High by Historical Standards

The March decline in consumer confidence among Japanese households is, in all likelihood, a non event. Confidence among Japanese households of two or more persons on a non seasonally adjusted basis (the headline measure) fell from 49.8 in February to 47.9 in March.However, the monthly series, which has been in existence only since April 2004, has consistently shown a decline in the last month of each quarter as shown in the first chart. Seasonally adjusted data are available only on a quarterly basis and are based on the unadjusted quarterly data going back to the second quarter of 1982. On this basis, confidence in the first quarter of 2006 was 48.2, up from 47.9 in the fourth quarter of 2005.

Confidence is measured by a diffusion index. Expected changes in confidence are rated as follows: better (1), slightly better (.75), the same (.50), slightly worse (.25) and worse (0). The index is a weighted average of the expected changes. The March value of the index at 47.9 implies that there are more households who are less confident that conditions will remain the same or become slightly worse than those who are confident that conditions will be the same or will improve.However, the level of the index is probably less important than its trend. During the entire time in which the index has been available it very rarely has been above the 50 level. This may or may not be an indication that Japanese households are always overly pessimistic. What is important is whether the households are becoming more or less confident. As the attached chart shows, the improvement in confidence that has taken place since the fourth quarter, 2001 low point of 33, has reached a point where it is now among the highest levels recorded. (In the attached chart, which includes the recent monthly data and the historical quarterly data, the latter have been smoothed by using the "interpolate" option under Tools.)