Japan’s LEI Rises to Four-Month High

Japan's leading economic index in February has risen to a four-month high. The index is still falling at a 3.4% annual rate over 12 months, and at a sharper, 7.5% annual rate over six months. But over three months the index is gaining, rising by 0.4% at an annual rate.

However, the OECD amplitude-adjusted index is slightly lower in February and the OECD index shows a decline of 0.6% over 12 months, a decline at a 1.1% annual rate over six months and a declined at a 1% annual rate over three months.

Four of the five available components for the leading economic index show increases over three months and over six months and three of five show increases over 12 months. Japan's LEI metric has reasonably broad support based on the performance of these five components that are available at this early date. The full index includes other components that are not available quite yet.

The chart shows us that the rebound on the month is not very vigorous and of course the data calculated in the table tend to reinforce that view. It is too early to say that Japan is having any kind of a revival because this is something that on the graph looks more like a flat spot in the index rather than an actual rebound because the rebound itself is so faint.

Global economic conditions remain particularly challenging. Japan itself is undergoing a shift in leadership at its central bank. The central bank has implemented a policy of ‘yield curve control’ that has resulted in its purchasing and holding a huge volume of government securities on its balance sheet. Bank of Japan policy has successfully been able to finally take the domestic inflation rate above its 2% target after years of not being able to get inflation up to the target. It may be that Japan's legacy of deflation has finally been defeated, but since Japan’s population growth is negative and the population continues to decline, it's very possible that such a problem could reemerge.

For now, Japan's inflation rate is above its 2% target but not like in other developed economies where the central banks are aggressively raising rates to try to bring inflation back down. Rather, in Japan, the question is about whether this higher inflation rate is going to have staying power above the 2% level or not. It is widely believed that there's a lot of temporary or transitory in the current inflation rate. Still, there is new leadership at the central bank that will have to take a look at this and decide whether for this reason or other more structural reasons BOJ policy needs to move in a different direction. Japan succeeded in stopping deflation and finally getting the inflation rate above its target, but it paid a huge price for it in terms of accumulating a massive quantity of government security on its balance sheet and affecting the functioning of trading in its government securities market.

Globally, economic growth remains challenged although we're in a peculiar period during which PMI data suggest that there has been some rebound particularly in the services sectors even as manufacturing remains under pressure globally. Price inflation remains high globally and above central bank targets for every central bank that targets inflation. In some places, of course, central banks are much farther away from their target than in others and not as far along in raising rates to a point that would return inflation to target soon. Still, the rapid increase in interest rates, led by aggressive rate hikes in the U.S., has created some destabilization of the banking sector globally that is a factor that central banks continue need to consider as financial stability needs have climbed up the list of central bank challenges even as they implement anti-inflation policy. In February Japan has an increase in its leading economic index, but the outlook is still quite uncertain. The impact of Covid- and war-caused supply chain disruptions remain as impeding factors for global growth and for inflation. The way ahead is difficult to pin down.