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FOR WIRE TRANSMISSION: 10:00 A.M. JST, WEDNESDAY, OCTOBER 4, 2000

JAPAN COMPOSITE INDEXES OF 
LEADING AND COINCIDENT INDICATORS:
July 2000

The leading index for Japan decreased 0.2 percent in July, while the coincident index decreased 0.4 percent. These indicators represent a cautionary signal for the Japanese economy. 

  • The leading index has declined 3 percent in the six months ending in July, with over fifty percent of the individual indicators declining. This broad weakness suggests economic activity will slow in coming months.
  • The decline in the coincident index comes after six months of weakness in this indicator, suggesting that GDP growth may disappoint going forward.
  • While both the leading and coincident indicators have improved since mid-1998, Japan remains in the stagnation that has characterized its economy since the early 1990’s.

LEADING INDICATORS. Nine of the twelve components that make up the leading index decreased in July. The most significant decreases – in order from largest negative contributor to the smallest – are dwelling units started, hours worked for all industries, and the ratio of price to unit labor cost for manufacturing. The only two positive contributors to the index – in order from the most significant contributor to the least – are the six-month growth rate of labor productivity per man-hour and the inverted level of business failures. The index of overtime worked for manufacturing remained unchanged from June.

With the decrease of 0.2 percent, the leading index now stands at 89.5 (1990=100). This index decreased 0.6 in June and 0.9 percent in May. During the six-month span through July, the index has decreased 3.0 percent, and seven of the twelve components have declined (diffusion index, six-month span equals 45.8 percent).

COINCIDENT INDICATORS. Three of the six components that make up the coincident index decreased in July. The most significant decreases – in order from largest negative contributor to the smallest – are real wholesale sales, industrial production and real retail sales. The two positive contributions to the index – in order from the most significant contributor to the least – are the number of employed persons and wage and salary income. Real manufacturing sales remained unchanged from June.

With the decrease of 0.4 percent in July, the coincident index now stands at 103.6 (1990=100). This index increased 0.2 percent in June and 0.1 percent in May. During the six-month span through July, the index has decreased 0.6 percent, and four of the six components have declined (diffusion index, six-month span equals 33.3 percent).

DATA AVAILABILITY. The data series used to compute the two composite indexes reported in this release are those available "as of" 4 P.M. JST on September 27, 2000. 
At the time of the release, recent data for the following series are based on estimates: Manufacturing sales, retail sales, operating profits and change in consumer credit outstanding

The schedule for the Japan Leading Economic Indicators news release in 2000:
August data ... Wednesday November 1, 2000
September data ... Tuesday December 5, 2000

All releases are at 10:00 A.M. JST

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THE CYCLICAL INDICATOR APPROACH. The composite indexes are the key elements in an analytic system designed to signal peaks and troughs in the business cycle. The leading and coincident indexes are essentially composite averages of between five and eight individual leading or coincident indicators. (See below for details.) They are constructed to summarize and reveal common turning point patterns in economic data in a clearer and more convincing manner than any individual component—primarily because they smooth out some of the volatility of individual components.

Historically, the cyclical turning points in the leading index have occurred before those in aggregate economic activity, while the cyclical turning points in the coincident index have occurred at about the same time as those in aggregate economic activity.

A change in direction in a composite index does not signal a cyclical turning point unless the movement is of significant size, duration, and scope. Historical analysis with U.S. data shows recession warnings are best determined by looking for negative growth of at least 1 percent, coupled with declines in at least half of the components over a six-month span. Further explanations of the cyclical indicator approach and the composite index methodology appear in The Conference Board’s Business Cycle Indicators page:     Methodology and Revisions.

Japan Composite Indexes: Components and Standardization Factors

Leading Index Factor
1. Yield Spread .2310
2. Six Month Growth Rate of Labor Productivity .0859
3. Change in Consumer Credit Outstanding .0001
4. Index of Overtime Worked .0546
5. New Orders for Machinery and Construction .0266
6. Stock Prices .0252
7. Operating Profits .0410
8. Price to Unit Labor Cost .0608
9. Money Supply .1504
10. Dwelling Units Started .0153
11. Business Failures .0144
12. Hours Worked .2947

 
Coincident Index Factors
1. Wage and Salary Income .1660
2. Real Wholesale Sales .0810
3. Real Retail Sales .0890
4. Real Manufacturing Sales .1730
5. Industrial Production .1050
6. Number of Employed Persons .3860

Notes:  The component factors are inversely related to the standard deviation of the month-to-month changes in each component. They are used to equalize the volatility of the contribution from each component and are "normalized" to sum to 1. These factors were last revised effective with the October 4, 2000 release, and all historical values for the two composite indexes were revised at that time to reflect the changes. (Under normal circumstances, updates to the leading and coincident indexes only incorporate revisions to data over the past six months.)

The factors above for the leading index were calculated using 1977-1998 as the sample period for measuring volatility. Separate sets of factors for the 1974-1977 period, 1970-1974 period, 1966-1970 period and also 1965-1966 period are available upon request. The factors above for the coincident index were calculated using 1970-1998 as the sample period; a separate set of factors for 1965-1970 period is available upon request. These multiple sample periods are the result of different starting dates for the component data. When one or more components is missing, the other factors are adjusted proportionately to ensure that the total continues to sum to 1. For additional information on the standardization factors and the index methodology visit the page: Methodology and Revisions.

To address the problem of lags in available data, those leading and coincident indicators that are not available at the time of publication are estimated using statistical imputation. An autoregressive model is used to estimate each component. The resulting indexes are constructed using real and estimated data, and will be revised as the data unavailable at the time of publication become available. Such revisions are part of the monthly data revisions, now a regular part of the U.S. Business Cycle Indicators program. The main advantage of this procedure is to utilize in the leading index the data such as bond yields, stock prices, and change in consumer confidence that are available sooner than other data on real aspects of the economy such as housing starts and new orders. Empirical research by The Conference Board suggests there are real gains in adopting this procedure to make all the indicator series as up-to-date as possible.