Fathom’s Economic Sentiment Indicators aim to combine information from a range of surveys from multiple sectors to gauge underlying sentiment within the economy. Japan’s ESI has been on a continuous downward trend since the end of 2017 and continued to tumble throughout 2019 Q3. It has now reached its lowest level since November 2012, with a reading of -0.4%.
Surveys which are forward-looking, rather than those focused on current conditions, appear more pessimistic. One example of this is the ‘economy watcher’s survey’ of employees in sectors that are sensitive to economic swings. The indices of current and forecast future conditions diverged remarkably over the past quarter, suggesting unusually high uncertainty about future economic conditions.
This divergence is probably attributable to the imposition of a higher consumption tax, which was implemented on 1 October. The last such divergence occurred ahead of the last tax hike in 2014. While this tax hike — which was long delayed amid fears it could send the economy into recession — appears to be one of the factors driving sentiment lower, it also provided a boost to economic activity in Q3 as consumers brought forward their spending.
September retail sales sky-rocketed at their fastest annual pace since the previous tax, driven in large part by spending on durable goods before the tax kicked in. Even in August, consumption of durable goods had jumped by 12.2% over the previous month.
However, this front-loading of private consumption ahead of the tax hike suggests most of this sugar-high unravelled in October and will weigh on economic growth in Q4. Ahead of the tax hike, the government had announced a cashback scheme which effectively promises to fully offset the new tax on card purchases, hoping that this would smooth out consumption. The sharp rises in retail sales, however, throw into question the efficacy of that plan.
In one glimmer of hope that the domestic economy did not suffer too hard a blow, the Cabinet Office’s survey of consumer confidence ticked up slightly in October — the biggest increase since September 2017 and a sign that Japanese consumers may have weathered the tax hike relatively well. However, the full extent of the impact of the policy will probably only be known in several weeks’ time, when the first hard indicators on economic activity for October trickle in.
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