Japan's Surveys Show Mixed Conditions

Japan's surveys - for those available through June- show mixed and inconsistent readings. This suggests that the economy is going through some turmoil since indicators for the same economic concept are sometimes giving very different readings.

We saw that already with release of the industrial production report that showed abject weakness in contradiction to the S&P Global manufacturing PMI readings that are showing continued expansion in the sector.

Japan's economy watchers indexes are quite high-valued with standings in the 90th queue percentile except for the retail sector. However, even for the economy watchers framework, the future index is substantially weaker with only a 39th percentile standing.

All Teikoku indexes are below the 50th percentile which puts them below their median readings. However, most of them have readings that are in the 35th percentile to 40th percentile range with wholesaling being an exception and closer to its median value of 50%. The main readings from the METI indexes show the reading for industry has a 3.5 percentile rank standing which makes its signal much more like what we see from industrial production. The reading for services has a 47.9 percentile standing which agrees with the Teikoku framework and it's much weaker than the economy watchers indexes.

However, in the table we also evaluate these same indexes by looking at their ranking in terms of growth year-on-year. In terms of growth the economy watchers indexes are generally weaker but are still quite firm with the overall economy watchers index at a 75-percentile standing instead of the 90% standing it has on its level. The future index evaluated in terms of yearly changes falls from a 39-percentile standing to a 26-percentile standing – it becomes even weaker. The Teikoku indexes looked at it in terms of their changes have growth rates that are generally higher than their level standings; manufacturing for example has a 44-percentile standing (42% on levels), retailing has a 58-percentile standing (39% on levels), services have a 78-percentile standing (40.6% on levels) and so on.

The growth ranking from the METI indexes gives stronger readings than the level indexes with the industry ranking rising to 15th percentile from the 3.5 percentile, a stronger reading but still a very weak reading – and not much change in economic terms. However, for the tertiary (or services) sector the 48-percentile standing for the index level moves up to a 96-percentile ranking in terms of growth.

There also are readings for the leading economic index. The LEI when evaluated as an index level has a 78-percentile standing; however, evaluating the growth of the LEI index finds that standing falls to the 42nd percentile below its historic median.

The rankings of these metrics on growth or levels shows idiosyncratic differences. The economy watchers complex gets a little weaker, Teikoku get stronger, the METI readings are mixed, the LEI is weaker when evaluated on growth. There is little generalization here.

Japan is affected by the performance of his trade partners, too. Its largest trade partner is China that just reported GDP. China's GDP grew by only 0.4% year-over-year in the second quarter that follows the fourth quarter year-on-year gain at 4.8%. GDP in China had been expected to rise by 1% in Q2, so a slowdown was expected but the 0.4% reading is even weaker than expectations. Clearly Japan is being hampered by the fact that its main trading partner has slowed down and continues to have growth interrupted by lockdowns put in place to hamper the spread of COVID. Looking at China's GDP growth rate quarter-to-quarter, we find more severe weakness as GDP fell at a 2.6% pace in the second quarter which is a faster drop than the 1.5% fall in the first quarter.

Japan is in a period when it's struggling. We saw a sharp decline in industrial production affirmed this week. Several Japanese surveys show erratic performance. Japanese household spending fell on the month. Japan's biggest trade partner is struggling and showing declines in GDP. It's not surprising amid all of this that the Japanese yen has been steadily weakening and weakening severely. Japan's inflation continues to creep up. And while Japan has been trying to get its inflation higher for several years, the way that inflation is rising now is in all the wrong places and this is not exactly what the Bank of Japan was looking for.

Japan continues to struggle. Its struggles are also the struggles of Asia. Asia continues to have geopolitical issues with China continuously rattling its saber over Taiwan. Perhaps it is doing that more often to take people's minds off the conditions in the domestic economy. Whatever the reason, between geopolitics and economics there's turmoil in Asia and Japan is in the middle of it.