Facts and figures on the Japanese economy have dribbled out since the March 11 disasters. The latest data release, on Monday morning, dealt with February figures and showed that Japanese core machinery orders fell a larger-than-expected 2.3 per cent in February from January.
As it was all about industrial activity before the March 11 earthquake and tsunami, and came after January’s 4.2 per cent monthly surge, the release didn’t hold that much interest for those gauging the economic impact of the disasters.
But the figure far exceeded the average forecast of a monthly decline of about 0.9 to 1.1 per cent, including Goldman Sachs’s prediction of a 0.7 per cent monthly drop. It therefore appreared to reinforce fears of collapsing business confidence even before the March 11 disasters .
Coming on top of Monday’s move by Citigroup to downgrade Japan’s top three carmakers to “sell” from “buy”, the data weighed on the Nikkei 225 stock average, which closed down 0.5 per cent to 9,719.70 on Monday — and that was even before another quake struck Japan’s northeast coast and rocked Tokyo at about 5.25pm Japan time.
But as Goldman’s Tokyo economic team (rightly) highlights in a Monday note, data that could be useful in gauging the state of the Japanese economy since the earthquake is still woefully limited.
So far, Goldman’s conclusions from scant data that applies to the post-quake economy include: first, that downside consumption risks are growing; second, that manufacturing sector business sentiment is worsening; and third, exports that are declining. But, it says, “only future data will tell us whether the impacts seen right after the earthquake are persisting”.
The Wall Street Journal however seizes on Monday’s release of machinery orders to say that key data are in fact starting to reflect the postquake economic sentiment.
Japanese core machinery orders fell 2.3 per cent from a month earlier in February, which the government said showed sluggishness in the economy even before the March 11 disasters. Notes the Journal:
The fall in this leading indicator of corporate capital investment even before the disaster struck is the latest negative sign for the Japanese economy. Firms must invest to rebuild destroyed or damaged factories, but plummeting consumer confidence, power outages and concerns surrounding the crisis at the Fukushima Daiichi nuclear power plant may drag on capital expenditure, which accounts for around 15% of the economy.
The article also cites Friday’s government’s “Economic Watchers” survey, which showed that sentiment in the domestic economy, especially the service sector, fell at record pace to a two-year low in March. Like the Bank of Japan’s quarterly tankan survey, however, much of the data gathering for this survey is likely to have been conducted ahead of the March 11 quake and tsunami.
Still, for Goldman as for many economists, there is “not enough post-earthquake data”. The note continues:
Nearly a month has passed since the March 11 earthquake. Looking at what macro data tell us about the impact of the earthquake, we find that there has been little macro data released… We look here at four statistics… released during this period: the March PMI, March BOJ Tankan survey, March Korean trade statistics, and the March Economy Watchers Survey.
This is what the four main sets of stats tell us, according to Goldman:
The March PMI showed the disasters “had a large impact on manufacturing sector sentiment”, although the diffusion index for March fell to 46.4 from a February reading of 52.9, the largest monthly decline since the survey began in 2001. Still, notes Goldman, this was still well above the DI level seen in the 2009 global demand shock.
The BoJ’s Tankan survey to March, meanwhile, failed to show “notable impact on the present conditions DI”, even though the BoJ separated out the post-earthquake results. As FT Alphaville noted, these at least showed a more negative outlook. Still, says Goldman, the March Tankan “is insufficient to gauge business sentiment due partly to a low response rate” (in the wake of March 11).
On the impact of the disasters on overall trade trends, March Korean trade statistics show no evidence of that. “Growth in exports to Korea is increasing, as is growth in imports from Korea”, says Goldman. The stats reveal evidence of the earthquake’s impact on certain items, but do not show any dramatic changes in overall trade trends. However, the note adds, it “is worth paying close attention to future data as a key to trade trends in light of potentially disruptive factors in monthly statistics including import inventory buildup in Korea from precautionary motives and near-term growth in daily essentials following the earthquake”.
Then there are Japanese trade figures for the first 20 days of March. These show that both exports and imports slowed. While the figures show only total value, Goldman notes that growth was “much slower in the middle third of the month than the first third for both imports and exports”. It adds:
Since the middle third was the period immediately following the earthquake, it is likely that trade activity was slowed by impact on port operations, transportation stoppages, and temporary halts in transportation due to uncertainty over the nuclear power plant. The trade surplus increased because import deceleration exceeded export deceleration.
Finally, there is the March Economy Watchers survey, which showed a record single-month decline that was much steeper than Goldman expected. It notes:
The household DI for current conditions fell 22 points, to 25.3. Both current conditions and the outlook deteriorated badly. Consumer sentiment was depressed by a combination of (1) sluggish distribution (delivery delays), (2) consumption denial, and (3) power outages. Further declines of this magnitude would put pressure on our consumption forecast. However, we do not think this is likely.
Currently, factors (1) to (3) are easing. In addition, special factors need to be taken into account. The March response ratio was 87.8% for badly damaged Tohoku compared with only 57.2% nationally. This must surely have pushed down the sentiment count. At the same time, the Watchers Survey position as a proxy for overall consumption was probably weaker. We therefore think we need to see how far sentiment declines in April and subsequent months to get a better idea of the consumption trend.
Further sources of uncertainty remain, however. Namely:
(1) the dampening effect on exports from Japan of reports in overseas economies about damage in Japan; (2) the extent of supply chain impacts; (3) the nuclear power plant situation; (4) trends in overseas economies, which are beginning to tighten monetary policy; and (5) the size of the boost provided by government reconstruction demand.
On the micro front, meanwhile, auto sales are down and the tourism business is slumping, adds Goldman. As suggested by the decline in consumer sentiment, “a large falloff in consumption looks almost certain”.
This coming week however will bring some key data points, the note concludes, pointing to Reuters Arpil Tankan survey, to be issued April 14, which can be expected to “strongly reflect the earthquake impact”; and the March corporate goods price index on April 13 — a snapshot of price trends in “intermediate goods and foods”.
Three factors will affect the coming CGPI, it adds: first, near-term earthquake-related consumer goods demand (for example, batteries and soft drinks); second, demand for construction materials; and third, a decline in demand for consumer durables due to deteriorating consumer sentiment.
Related links:
BoJ: A more focused ‘QE3′, Japanese style - FT Alphaville
The hidden slide of Japanese business sentiment - FT Alphaville
Five reasons the yen will strengthen - FT Alphaville
Edward Chancellor: Last chapter in Japan’s deflation saga - FTfm