Japanese Recession Getting Worse

November 10, 2008

Japanese core domestic machinery orders, the best leading indicator for business capital spending, plunged 10.4% last quarter, a drop of 35.6% at an annualized rate. That decrease followed a 0.6% uptick (2.5% saar) in the second quarter and was more than three times sharper than the 3.0% drop that officials had projected three months ago. Foreign demand for machinery dived 7.3% (-26.1% saar) in the third quarter, also much worse than the 0.1% dip anticipated by officials. Public-sector orders dropped 10.1% in 3Q, compared to a predicted 1.5% drop. For the present fourth quarter of 2008, officials expect core domestic machinery orders and government orders to rebound 1.2% and 8.9%, but project an additional 13.3% decline in foreign orders.

Japan’s manufacturing PMI moved deeper into contractionary sub-50 territory with a 7-year-low reading of 42.2 after 44.3 in September. The PMI had average quarterly scores of 46.1 in 3Q, 47.6 in 2Q and 50.9 in 1Q. The forward-looking orders component dived to 34.5 from 39.6.

Compared to a year ago, job offers are dow 13.4%, employment is 0.5% lower, and the ratio of job offers to job seekers is off 0.19 at 0.84, a 49-month low. Consumption stagnated in 3Q, and consumer confidence is very weak. Real wages are falling after summer bonuses dropped in consecutive years. Lower readings on consumer confidence and the sentiment of employees at small firms, due Wednesday, seem likely following prior scores in these diffusion indices of 31.4 and 27.4. Current account figures and bank lending numbers will be released tonight. On a customs basis, exports to the United States and EU recorded on-year declines of 10.9% and 9.0% in September, while shipments to the rest of Asia only went up 2.9%. The first reading on third-quarter GDP arrives a week from today.



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