Japan Sector Indices Paint Mixed Picture

Japan’s sector indices are each well below their recent peaks on the charts. Each shows a decline for the period of the financial crisis, from which manufacturing and services made some sort of recovery. Each also depicts the hit from Japan’s disaster that struck about one year ago (but the current Japanese data are only up-to-date though January 2012).

Construction was battered by the financial crisis and never really recovered, it just kept reeling. Strangely, this sector was just starting a recovery of some noticeable magnitude when the disasters struck Japan last year. This drove the construction sector back down to a new cyclical low. Construction moved up a bit from that low but it is still only oscillating and moving sideways.

The manufacturing sector fell sharply in the financial crisis then made a partial recovery and was oscillating and moving sideways at a well-below peak level of activity when the tsunami/earthquake/nuclear disasters hit. The impact was abrupt and so was the recovery but this time the recovery did not make it back to even its reduced peak of the post crisis period. However, manufacturing and mining do seem to be making a new move higher. That is the one encouraging sector.

The services index is noted for its broad flat segments and its mild uptrend. The sector rolled over in the financial crisis and then had been making a gradual recovery, until the triple disasters hit, driving services sharply lower. The post-tsunami recovery was relatively rapid and services is the only sector where the post disaster recovery has been ‘complete’ in the sense that the index reached a new high, although the January report for the tertiary sector is so weak that services are now back below their pre- disaster peak again.

Japanese sector details are not so encouraging. Services may be mounting a real recovery but clearly it remains challenged. The manufacturing and mining sector is still recovering but it is still hard to gain the strength. Moreover, since Japan is still export-oriented, recovery will depend in part on the strength of the global economy where China is still challenged, Europe is facing some real difficulty and only the US appears to have a strengthening recovery in train. While the construction sector remains in the doldrums, Japan has a great need to rebuild and bureaucratic entanglements have prevented that process from getting in gear. It is reasonable to expect that sector will begin soon to make a stronger contribution to growth.