Japan's IP Is Revised Higher As Economic Surveys Lag

Japan's industrial output surged in August with manufacturing output rising by 3.5% month-to-month after rising 0.8% month-to-month in July and rising 9.1% month-to-month in June. The three-month growth rate is off the charts at 68% annual rate. That compares to an annualized growth rate of 8.3% over six months and of 4.3% over 12 months. Clearly there is some catch-up going on with industrial production. Japan is planning stimulus programs for its economy.

Surveys show some mixed progress, but lag the strength in the IP report Survey data for August failed to show the same kind of enthusiasm as the industrial production report, which showed an upward revision in today’s release. The economy watchers index, a diffusion index report, rises to 45.5 in August from 43.8 in July with its future index rising to 49.4 in August from 42.8.

Sector indexes from Teikoku, another diffusion report, show manufacturing slipping to a diffusion reading of 41.0 in August from 41.3 in July; retailing steps up to 36.3 from 35.7; wholesaling slips slightly to 39.2 from 39.5; services move higher to 45.4 from 44.4. The construction sector is better by just a few ticks at 43.3 in August compared to 43.1 in July.

The METI indexes for industry and services both showed monthly gains.

Growth vs. activity levels Evaluating the economy watchers and on the Teikoku indexes by their growth rates, we'll find more strength in the economy watchers survey.

The economy watchers indexes show rankings based upon year-over-year growth in the 90th percentile for the headline index, for the retail sector, for eating & drinking places, and for the service sector readings. However, if we evaluate those same sectors based on the levels of the indexes, since these are diffusion indexes, we get a view of the level of performance rather than an assessment of growth. The economy watchers index has a 33.6 percentile standing for its level, below its historic median; the retail sector has a 40.6 percentile standing; eating & drinking places have a 15.4 percentile standing; the services sector has a 25.9 percentile standing. Viewing employment overall, employment increased to a diffusion reading of 52.5 in August from 50.7 in July, with the growth ranking in its 73.4 percentile but with an index standing that is much weaker, in its 42.7 percentile. Pitting the growth rankings against the index level rankings, it's quite clear that Japan is still relatively weak in terms of performance, and this is what the index level ranking tells us. However, the growth ranking tells us that there has been a spurt which has not yet elevated growth to a strong position but there has been a spurt that has boosted the economy short term.

The Teikoku indexes show somewhat the same phenomenon with the growth rankings generally above the diffusion index level rankings. The manufacturing sector is an exception with a growth ranking at its 42nd percentile and an index level ranking nearly the same at the 43rd percentile. But retailing has a 74.1 percentile growth ranking compared with 37.1 percentile level ranking; wholesaling has a 60.8 percentile growth ranking compared to a 44.1 percentile index ranking; services have an 80.4 percentile ranking on growth compared to a 39.9 ranking on its index level.

Separately, the METI indexes shown improvement for industry on the month and an improvement for the tertiary (or services) sector month-to-month. The growth rankings of these two sectors put industry in the 88th percentile and the tertiary index growth rank in its 95.7 percentile. However, the levels of these surveys show index rankings in the 52nd percentile for industry and in the 39th percentile for services, both significant step backs.

Orders Japan orders failed to confirm the near-term strength in growth as in August total orders, core orders and foreign orders all fall sharply with only domestic orders moving up by 1.9% month-to-month. The growth ranking for orders reverses the earlier trends. The total growth ranking on year-over-year growth is 34.7%; however, the level of the index is at its 90.9 percentile. Core orders have a 66.9 percentile ranking on growth, compared to a 91.6 percentile on levels. However, the orders data aren't comparable to the other data in the table since orders are an ordinary accounting time series that adds up the value of orders; orders are not a diffusion index. The other series are diffusion indexes that measure output breadth. Over time we naturally expect an orders series based upon ordinary data to grow and therefore the level index will tend to grow even if it's growing insufficiently. Diffusion industry indexes don't have that same property.

Summing up On balance, when we look at the Japanese data, we get a very similar reading based on the various metrics. That reading says that there has been some sort of spurt in short-term growth, but the assessment of the economy remains weak. However, there are some stimulus programs in train for Japan and Japan does have the advantage of the yen’s value having fallen on foreign exchange markets. This has improved its competitiveness. However, Japan pays a price for that in terms of having to pay more for energy and other imports. Some of that advantage gets offset. Still, the data from Japan are encouraging. The industrial production data are especially encouraging, and the survey data may simply have yet to show some of the strength we see in industrial production. Diffusion momentum and the assessment of the level of activity is lackluster while industrial production shows strong gains in output growth that may yet lift the diffusion measures out of their lethargy. The fly in the ointment for Japan is state of the international economy where growth is slipping, and its trading partners are struggling.