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July 30, 2018

Chart of the Week: Japan’s Economic Sentiment Falls Again

by Fathom Consulting.

by Fathom Consulting.

Our Economic Sentiment Indicator (ESI) for Japan fell again in Q2, confirming our suspicion that last quarter’s reading marked the start of deteriorating consumer and business sentiment after a post-crisis peak at the end of last year.

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The fall in sentiment was fairly broad based, except for a few forward-looking surveys, which revealed that business respondents were mildly more optimistic about the future than three months ago. Even so, at around 4%, our measure of economic momentum remains some way above official estimates of growth, with a Reuters poll predicting annualised GDP growth of 1.6% when Q2 data are released next week. Prior to that, the Bank of Japan will conclude its two-day rate setting meeting. Speculation that the Bank will adjust its yield curve target, which has been blamed for harming banks’ profitability, has forced the Committee to intervene in the government bond market again this week.

Looking ahead, we expect the wedge between soft and hard data to narrow as sentiment better reflects the domestic situation, and official output data recover from an unexpectedly large contraction in Q1.

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