The index is now at the same level as it was when Japan was when Japan last entered recession in 2001. The Cabinet Office downgraded its assessment for the index for the first time in three months, saying that sentiment is "worse than very weak." The classification in December was "very weak".
In the face of the evidence people are now begining to adjust their positions. Bank of Japan Governor Toshihiko Fukui said today the cycle of profits feeding into wages and consumption that he had consistently argued had supported what has been on some measures Japan's longest postwar expansion is now "temporarily weakening", of course we are about to see how long "temporarily" actually means, since on many measures earnings and consumption have never been strong during the expanision phase, so what they will look like during the contraction one is anyone's guess. Consumers are currently being squeezed by falling wages, a tighter job market and a 14 percent plunge in the Nikkei 225 Stock Average.
There is a lot of speculation around about the precise meaning of the fact that household spending actuall rose 2.2 percent year on year in December even as consumer confidence dropped to a four-year low. "Consumer spending is solid, even though consumer confidence has deteriorated considerably" central bank Deputy Governor Kazumasa Iwata said yesterday. My own personal feeling if we now look at all the other indicators, is that this must have been a blip (and also December 2006 was a reasonably low level), but still we will soon start to find out when we get the January data.
Consumer confidence remains at a four-year low and companies keep a tight lid on wages even as they pare-back hiring as demand slows. Indeed wages had their biggest drop in three years in December, making it unlikely in my view that the consumer will step up to help the world's second-largest economy overcome slower export demand.
