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Is Japan on the verge of a recession? Put down those diffusion indexes!

April 13, 2007
By Ken Worsley


Takehiro Sato and Takeshi Yamaguchi of the Morgan Stanley Global Economic Forum take a look at the question of whether or not Japan is on the verge of a recession and come to the conclusion that Japan is not at risk of experiencing an economic recession, despite recent data from the Cabinet Office showing all three diffusion indexes under the 50% level in February. Those three indexes, which are published monthly as part of the Indexes of Business Conditions Report, are the leading, coincident and lagging index.

The leading index is meant to project the economy’s performance in the coming months, the coincident index in the month surveyed, and the lagging index in the six to twelve previous months. February’s data showed the first time since February 2005 that the leading, coincident and lagging DIs were all below 50% in a preliminary reading. However, should the data remain under 50% when the final results are announced (which seems likely), it will be the first time since December 2001 that such a situation arises.

The Cabinet Office data has spooked some, but Sato and Yamaguchi have their reasons to believe that Japan will continue to grow at a 3% annualized pace in the first quarter of 2007, followed by a slightly lower 2% annualized pace in the April-June period.

They believe that ’special factors’ have contributed to the lower diffusion index numbers in February. For the leading index, they cite three factors, the first of which I found interesting:

(1) New job offers: Companies restricted new offers in response to tougher scrutiny from authorities toward fake subcontracting practices and falsified job openings. While new job offers are a leading indicator for effective job openings and typically move ahead of economic activity, the latest decline is unrelated to the economic cycle, in our view. In fact, the BoJ’s March Tankan survey reports growing labor shortages at companies of all sizes.

Interesting. Here is where I would love to see some numbers dished out. It absolutely does seem as though companies are on the hire, or perhaps that’s my Tokyo-tinted lenses speaking. I have to wonder how the Cabinet Office collects its data and why this was not footnoted in the report, or if it wasn’t for a reason…

Filed Under Cabinet Office, Economic Reports 

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Comments

3 Responses to “Is Japan on the verge of a recession? Put down those diffusion indexes!”

  1. Steve Schapiro on April 15th, 2007 12:59 am

    How do you define “recession”? Seems to me a “recession” in Japan would be a European finance minister’s wet dream.

    In Tokyo, it’s, “Oh shit, economic growth is under 2% and unemployment is almost at almost 4%. We’re doomed.” Outside of Japan, the US, and UK, it’s, “Oh shit! Woo-hoo! We have growth if you fudge the numbers the right way! Unemployment might drop down to single digits in some areas! Rock on!”

  2. Ken Worsley on April 15th, 2007 8:15 pm

    Steve,

    A recession is when your neighbor loses his job. A depression is when you lose your job.

    Seriously, in the media we usually see the definition of a recession as being a decline in the GDP for two or more consecutive quarters. This does not take into account unemployment rates or consumer confidence indexes, so many people don’t like this definition.

    If you’re really interested, check out the National Bureau of Economic Research’s guidelines for recession dating procedures.

    As far as, ‘We have growth if you fudge the numbers the right way,’ goes: That’s a serious accusation unless you can demonstrate how those numbers are being fudged. There are many who say the opposite, that Japan’s unemployment numbers are fudged and those of Germany and France more accurate reflect economic reality in those nations.

  3. Cabinet Office: Revised Index of Business Conditions for February : Japan Economy News & Blog on December 2nd, 2007 10:28 pm

    […] today, the Cabinet Office released its revision of April 6’s preliminary Index of Business Conditions. As expected, all three key diffusion indexes remained under the key figure of 50, which means that […]

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