The latest Data from Japan’s Cabinet Office shows that Business conditions in Japan deteriorated slightly in May against their level reached in April. This has affected the Coincident Index more than the Leading Index. Overall the gap between the two indexes remains significant as Japan is still grappling with the COVID-19 pandemic amid promises made by the Suga administration to accelerate the vaccination campaign and to continue supporting the economy.
Detailed analysis and impact on GDP growth projections
Going into more detail, compared with April the changes to the level of the leading index have mostly been related to negative contribution of the sales forecast of small businesses and money stock growth (M2) the latter being mostly the result of a stronger baseline on a yoy basis. In addition, the inventory to sales ratio has increased in May which dampens the prospect for new orders.
For the coincident index, the changes are more obvious. Almost all the components of the index have witnessed a deterioration in their readings, including industrial production and producers shipments. Retail sales have also moved back in negative territory together with exports. This is rather surprising given the strong growth impetus witnessed in some partner economies but overall it reflected the continuation of restrictions in May in some major economies like the European Union, as well as a softening of industrial production growth in China.
Comparing the Cabinet Leading index with the OECD leading index for Japan, whose figures are given up till May, and our own Output Factor which has very preliminary readings for June and July, we can see that the recovery dynamic is still strong but that there is a turning point which warrants a softening in Q3 everything else being equal.
In turn, this translates into a slight downward revision of our quarterly and annual GDP growth forecasts. We expect GDP growth to reach 2.7 percent QoQ in Q2 2021 and to remain flat afterward in H2 2021. Given the outstanding carryover effect as of Q1 (1.5 percent), this would translate into an annual GDP growth rate of 3.5 percent in 2021. For 2022, we forecast a GDP growth of 1.5 percent.