Japan’s Economy Watchers Index Takes a Step Back

Japan's economy watchers index took a step back in September after rising in August. The step back takes the September level down to just a few ticks above its value in July. The future index for the economy watchers survey also edged lower, although not as definitively as the current index; it fell to 49.7 in September from 50.3 in August, still above its July value by more than a point. Ranked on data back to 2002, the current economy watchers index has a queue standing in its 53rd percentile, putting it just slightly above its median for that period. The median on ranked data occurs at a ranking of 50%. The future index is slightly stronger with a ranking on the same timeline at about its 59th percentile.

Performance overview Both the current and the future indexes show widespread declines in diffusion values in September compared to August. In the current index, only the rating for eating and drinking establishments shows improvement in September; for the future index there are increases in the services index and in the reading for overall employment. Both the current and the future indexes are below the 50 threshold, which on the diffusion index implies a decline in activity. Looking at components, the current index has only one value - that for eating and drinking establishments - above 50 and has a reading for nonmanufacturing establishments exactly at 50. For the future index, the services reading has a diffusion value above 50 along with employment index and eating and drinking establishments; the reading for manufacturers is at 50.1, barely above 50.

Changes in index values; momentum Looking at changes in the current and future indexes over three months, six months and 12 months, both surveys show improvements over three months preceded by net declines over six months and over 12 months. The current index shows a continuous decline over three months, six months and 12 months for the retail sector, as well as for services. In contrast, it shows steady improvements over three months, six months and 12 months in manufacturing. The future index does not show any steady stream of sequential deterioration; however, it shows steady improvement with gains on all three horizons for services, for manufacturing firms, and for employment conditions.

Reading level evaluations Current- The queue percentile readings calculated on data back to 2002 show the current index at a standing of 53 percentile, above its historic median; however, there are below median readings in retailing and services and for employment - with employment having a particularly worrisome, weak standing in its 29th percentile. That means that the employment reading has been weaker than this, only about 29% of the time. In terms of strong standings, only eating and drinking establishments have a standing above the 80th percentile with an 87.7 percentile standing.

Future- By comparison, the future index has a stronger headline standing at 58.9 percentile and has two component readings with standings in their 80th percentiles for eating and drinking establishments and for services. The future index has two relatively weak readings that are below their 50th percentile mark; those are for housing and for employment. The housing standing is in its 34th percentile, a relatively weak standing; employment doesn't do much better with a standing at the 43.9 percentile.

A difficult employment scenario Employment scores out as weak in both the current and in the future standings although the future metrics show that employment has been improving over three months, six months and 12 months; in the current survey, employment only improves on balance over three months. Moreover, in the current survey the employment diffusion index falls by nearly a point month-to-month, while in the future survey the employment reading gains by nearly a point.

Summing up The economy watchers index shows a relatively broad weakening for conditions in September. While the economy watcher indexes continue to log levels above their historic medians, both the future and the current standings are showing some degree of decline in activity in September. Manufacturing tends to be a bellwether industry for Japan; it shows consistent improvement over 12 months, six months and three months in the current survey as well as in the future survey And manufacturing has above-median standings in both surveys although the standings are particularly strong; on the future reading has a diffusion value above 50. Because of the declines in September, we have to mark the survey overall as disappointing; however, there are some positive aspects in the report, particularly for the manufacturing sector.