Japan’s Economy Watchers Survey Weakens

Japan’s economy watchers survey has declined broadly in recent months, but recent weakness may overstate the degree of weakening present in the economy at this time.

Japan’s economy watchers current reading, a diffusion index of assessments, dropped in October to 49.5, down from 49.9 in September and from 53.6 in August. The future index also slipped to 48.4 from 49.5 in September and 51.4 in August. Both the current and the future indexes are slipping, although the current index still has a queue standing in its 67th percentile, barely on the top one-third of values it has experienced since 2002. The future index has a queue standing at its 49th percentile which places it just below its historic median; queue standing statistics put the median at a standing value of 50%.

The weakness in the indexes recently is quite striking with diffusion data shown at the bottom of the table. The monthly diffusion data calculate the proportion of indexes that are improved month-to-month. Diffusion values for October, September and for August all are at or below their 30th percentile indicating that even in the best month no current or future responses improved for more than 30% of the observations. This tells us that the deterioration is broad based over the last three months.

The sequential calculations in this table look at point-to-point changes as well. Since these are diffusion data, there's no sense in trying to annualize these data; these are just point-to-point changes and diffusion data. For the current observations, we have a decline of -4.9 points over 3 months, -5.1 points over 6 months and -1.3 points over 12 months. The slippage over 12-months is relatively small; the slippage over 6 months is substantial and because there's a 4.9-point decline over 3 months we can see that most of that slippage has occurred in the last 3 months.

The future index shows a decline of -5.7 points over 3 months, a decline of -7.3 points over 6 months and an increase of +1.3 points over 12 months. Expectations were slightly better over 12 months than they were a year ago. And once again the bulk of the slippage in this index has occurred over 3 months where 5.7 diffusion points are lost with only 1.6 diffusion points lost over the previous three months (to total -7.3 over six months).

At the bottom of the table, I calculated the diffusion statistics for the sequential changes slightly differently than they're presented in the table above. For the diffusion calculations, I first constructed averages of data over 3 months, 6 months, 12 months and 12-months ago. Then I calculate changes in the period-to-period average data. Calculated this way over 3 months all the current and future categories deteriorate. However, over 6 months all of them improve! Over 12 months compared to 12-months-ago 90% of them improve! Looking at the graphic, you can visualize a little bit more why this is true and why the metrics from the averaging process are so different from the results from point-to-point changes.

The hump-back camel in the data series The chart shows that from early-2023, these series were improving and since then they have stopped moving higher and have declined. The averaging process puts most of this decline into the recent 3 months. The six-month average fits up with these data in such a way that over 6 months the average is higher than the previous 6 months and similarly the 12-month average is much higher than the previous 12 months broadly speaking. The graphic also shows us we've had this ‘humped back profile’ of responses over the past year, explaining why 12-month changes are small while other, shorter-term changes, are larger. Recently monthly conditions have stabilized in terms of both the current and future conditions and for their judgment about employment conditions which is plotted on this chart as well.

The percentile standing data also are good arbiters of conditions. On data back to 2002, we have only two current categories that have percentile standings below the 50% mark placing them below their historic medians. For the future data, the situation is blunted with five components above their historic medians, and four below their historic medians. The standing of the overall future index just one diffusion point below its historic median – close to what we could term ‘normal.’

The chart focuses on data in the post-Covid period from 2021 to date. On this timeline, we can see that there is a general trend for improvement. And while there is a current weakening trend based on simple point-to-point changes, the data on averages remind us that this is a mild deteriorating trend; stability in the recent monthly observations points us to the potential for Japan being more in a period of stability than weakening.

The data and the trends are complicated enough that it makes sense to withhold judgment on what the trend is doing. We can clearly see that the current standing is still reasonably good with only two components showing below median results - but one of them is this response from employment and that is somewhat off-putting. On the other hand, the future index is very close to its median since 2020. The current and future indexes have been showing some signs of relative stability in recent months. It makes some sense to withhold judgment on where the trend is going and to accept this as a period in which the economy is moving sideways and in a period of relative normalcy. But that assessment is in flux.