Japan’s Economy Watchers Like What They See

Japan's Economy Watchers index for March moved up to 53.3 on the current index compared to 52.0 in February; February had moved up from 48.5 in January. The future index is also on the move and rising. The March value moved up to 54.1 from 50.8. And the February value of 50.8 moved up from 49.3 in January. Both the current and the future indexes moved from readings that suggested conditions were contractionary in January to showing expansion in February and further expansion and strength in March. The two readings are moving together; they're moving higher and this is a good sign.

Standings: current and future headlines The indexes have also moved to show relatively strong readings with the current index having a 92.9 percentile standing and the future index having a 93.3 percentile standing. Both the March readings are higher than they have been except for 7% to 8% of the past observations, indicating considerable strength in the report.

The current index: standings and diffusion readings The current index provides 9 separate sectors or functional readings and of these nine readings five of them have standings in their 90th percentile range. Only one reading, housing, has a standing below its 50th percentile. A standing below 50% suggests that the sector (housing) is performing worse than its median performance. Housing in the current index format also has a 45.9 diffusion reading. Housing has the only current standing that's below 50 in addition to being below 50 on diffusion, indicating that it is contracting as well. In February, housing, the corporation index and the manufacturing index all showed contraction in progress. In January, contraction was in progress for the current index overall and for all sectors except for services where activity was neutral and for employment which was marginally above 50 at a reading of 51.0.

Future index metrics The future index gives very similar results with only housing showing a contraction in March and with a contraction in February indicated in housing, by corporations, for manufacturers, and for nonmanufacturers as well. In January, the future index showed contractions for the overall reading as well as for all the sector and functional readings except for nonmanufacturers where the reading came in at 50.4, just barely indicating some expansion in that sector. Over the last several months, the interpretation of the Economy Watchers has shifted noticeably and not so much dramatically as significantly from contraction to expansion even though the previous contractionary readings were not particularly deep and the recent expansionary reading is not particularly strong. However, it's significant that it's moved from contraction to expansion for both the current and the future readings. The percentile standing for the future index shows a headline standing of 93.3% and 90th percentile range readings for five on the nine component readings; none with standings below their respective medians. Housing has the lowest standing at 54.5%.

Current momentum The table also shows momentum: look at the current index. These are sequential readings for changes point-to-point over three months, six months, and 12 months. For the current index over each of these horizons, all of the changes are positive. For each reading, the evaluation compared to the previous period (3-month compared to 6-month, 6-month compared to 12-month, and 12-month compared to 12-month ago) show an improvement. Over six months the changes decelerate across all categories, compared to the year-on-year changes reported over 12 months. But over 3 months all reading show an even larger increase over 3 month than over 6 months except for households and retail. Japan’s current Economy Watchers index shows not just improvement but acceleration.

Momentum for the future index The future index also shows nothing but positive readings on its sequential changes. Over 12 months, all increases are larger than their change of a year ago. But over 6 months, performance is spottier with the headline slowing its gain, and with six of nine categories showing less gain than over 12 months. The accelerating readings for 6-months are retailing, housing and employment. Over three months the sectors show acceleration with only two of nine changes weaker than their change over six months. The two lagging sectors are for corporations overall and for manufacturing.

Summing up The outlook readings are a bit of fly in the ointment. For the recently released Tankan survey, we saw widespread improvement in nonmanufacturing but a setback for manufacturing which is the bellwether in that survey. Having ‘only’ a setback for corporations and manufacturing may not be the ‘limited’ weakness result that it appears to be. However, in the current reading section, manufacturing was not only positive but still accelerating. For now, this is only a bit of a mixed signal – a difference between the current and the future readings on acceleration. One is accelerating, one is not, but both are improving. Still this is trend worth watching. Overall, it’s a good report from the Economy Watchers in March.