Japan Service Sector Backs Down After Spike Higher

The METI tertiary (Service index) for March fell back to 100.2 from 102.7 in February when it spiked from 100.5 in January. The spike high of February is now back below its January level. At the bottom of the table the IP index for industry (excluding construction) is presented side-by-side with the METI tertiary index (for Services).

The rank of year-on-year growth in the IP index and the rank for the tertiary sector growth both are low, in the 20th percentile of all growth rates since mid-2009. The level of the IP index has been weaker on that timeline only 10.3% of the time. The METI services index has been lower only 44% of the time. These rankings mark both the industrial and services sectors as weak- both are stronger more frequently than they are weaker.

Interestingly, the leading economic index for Japan has a level standing on the same timeline at its 53rd percentile, above its historic median (median resides at 50) and a year-on-year growth ranking in its 72nd percentile – quite a solid percentile standing.

The Teikoku indices are diffusion metrics. They cover five sectors of which only services have a diffusion value above 50, indicating expansion. And the services index value is at 51.0, not exactly decisively endorsing the trend for expansion. The Teikoku index shows below-50 values for a long string of values across sectors with only services above 50 consistently- but only for the last 13-months. The levels of the values for Teikoku are above their ranking of 50 on levels across sectors except for manufacturing. This, of course, tells us with such weak current diffusion levels, readings have been persistently weaker and contracting- since current index standings are above their historic medians broadly and yet current diffusion values also are broadly below 50! Growth rankings of current indices are all below their historic medians indicating that there is no revival in progress.

The economy watchers survey also employs diffusion indices across sectors and for employment as well as with a future index. In diffusion terms the selected indices show below-50 readings for retailing and for the current economy-watchers headline. Employment, the future index, and services, as well as eating and drinking place, show above-50 readings on diffusion. But the rankings on the year-on-year growth for these metrics in uniformly below 50 – revealing below-normal growth (below median, formally) for these indices. The index level rankings show all readings above their historic medians except for employment.

On balance Japan’s data show a great deal of substandard performance and a prolonged period of substandard results. None of this- however memorialized by statistics is surprising to any Japan economy watchers. Japan is dealing with a long-term population decline that policy has not yet addressed. It is ending a period of deflation flirtation and a period of extraordinary central bank stimulus to combat that situation. In the wake of Covid and persistent Bank of Japan stimulative policy, Japan has distanced itself from deflation, but policy is still trying to evaluate where the inflation situation stands. The yen is weakening and once again Japan’s policy faces challenges.