Japan: Leading Indicator Drops Again; Machinery Orders Fall

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Includes: EWJ, EWV, FXY, JOF
by: Edward Hugh

The Japanese government conceded yesterday that Japan's longest running postwar period of economic expansion might now be over as it reported a drop in its key measure of underlying economic conditions for June. The June coincident indicators index fell a preliminary 1.6 per cent and the government downgraded its assessment of the economy to "deteriorating." This effectively constituted an admission that the economy had probably entered a recession.

The coincident index, a composite of statistics including production and the ratio of jobs to applicants, fell to 101.7 in June from 103.3 a month earlier. A three-month moving-average of the index fell for a fourth month in June to 102.2 from 102.5.

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The Cabinet Office declares the economy has worsened if the index has fallen for one month and the three-month moving-average has declined for three or more months. The leading index, which signals the direction of the economy for the next three to six months, fell to 101.7 from 103.3.  Click to enlarge:



Machinery Orders Drop In June

Orders for Japanese machinery dropped back again in June. Equipment orders, which signal capital spending in the next three to six months, declined 2.6 percent from May, when they climbed 10.4 percent, according to the Cabinet Office in Tokyo this morning. Some analysts are reading the fact that total orders only fell by 4.8% m-o-m as a sign that the recession that Japan now seems to be in will not be a long one. I fail to understand the rational grounds for such a point of view.

Japan is an export dependent economy, and overseas orders were down 12.1% on the month. With China now evidently slowing and most of Europe and the United States headed for recession later in the year it is hard to see any imminent improvement in the export situation, indeed the position is basically quite the contrary. Added to this most of the important emerging market customers are now struggling with energy and food price induced inflation which is leading to a general monetary tightening across the central banks. Thus it is hard to see any imminent relief in sight. Things are very likely to get considerably worse before they get better.