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Thursday, July 05, 2007

Japan's Leading Index

Well, the latest reading on Japan's leading index seems to be causing some controversy. Earlier this week the Tankan came in with an unexciting but basically positive reading.

The Bank of Japan's closely watched Tankan survey of business confidence showed the large manufacturers' diffusion index, which subtracts pessimists from optimists, unchanged at +23. However, the index for medium and small manufacturers fell three and two points respectively to +13 and +6, suggesting some weakness in companies less exposed to export markets.

On the other hand wages continue their downward path (and see the analysis here):

Separate figures from the ministry of health and labour showed that total cash earnings fell 0.6 per cent in May from a year earlier, their sixth consecutive monthly fall. The numbers underlined the seeming paradox of Japan's "no-wage recovery" in which employers, even those making record profits, have been slow to pass on the benefits to workers.

That partly reflected the retirement of high-earning baby boomers, who were being replaced by women, pensioners on cheaper contracts and previously discouraged jobseekers returning to the labour market, economists said. Lehman Brothers said there were some indications in the Tankan that the labour market could tighten again, including strong plans for graduate hiring and a prediction of labour shortages in coming months.

and also note this part:

Mr Jerram said labour market data included in the Tankan survey showed that employment conditions had stopped tightening for the first time during the five-year recovery. That could be a temporary blip, he said, but it suggested that the bank might have to rethink its central assumption that tightening labour conditions would inevitably spark higher wages and prices - one justification for its pre-emptive rate rises.

The stock market was not very impressed with the implications for the property and construction sectors:

Property stocks continued their downward trend, hit this time by the tankan survey, which pointed to weakness for the sector. Mitsui Fudosan, Japan’s biggest property company, sank 1.2 per cent to Y3,420 while Mitsubishi Estate, its largest rival, slid 1.2 per cent to Y3,310.

Meantime back to Bloomberg and the leading index:

Japan's broadest indicator of the outlook for the economy signaled for a seventh month that the longest expansion in more than 60 years may slow.The leading index was 30 percent in May, the Cabinet Office said today in Tokyo, lower than the 40 percent median estimate of 27 economists surveyed by Bloomberg News. A number below 50 indicates the economy may cool in three to six months.

As I say by no means all economists are agreed on what this means, but looking closely at this and the details of the Tankan, it is hard not to reach the conclusion that the Japanese economy is slowing at this point, and that in this environment the BoJ will be very hard pushed to raise rates.

This impression is also strengthened by the news that Moody's is contemplating upgrading their Japanese sovereign debt rating. It isn't so much the fact that they are thinking about this that is important, but rather the reasoning behind the news:

Prime Minister Shinzo Abe has pledged to balance the budget by 2011 by cutting spending and possibly raising the national sales tax from 5 percent. The government will probably reduce bond sales for a third year in the 12 months starting next April, Chikahisa Sumi, director of debt management policy at the Finance Ministry, said last week.

So Japan is going to raise taxes and practice fiscal tightening. If we examine what is happening on the domestic economy front, which may well already be noting the end of the monetary easing policy, and the direction government policy on the fiscal front may evolve after the elections, then it is very hard to see the BoJ raising much, and indeed in the mid-term we may well be moving in the opposite direction.