Japan Cuts Formula-Based Economic View to Flag Higher Slump Risk

(Bloomberg) --

The Japanese government cut its formula-based assessment of the economy to indicate that economic conditions were worsening in August, an outcome signaling a higher risk that Japan could be entering a recession.

The coincident economic index fell 0.4 point to 99.3 in August, the Cabinet Office reported Monday, compared with an economists’ estimate of 99.4. The leading economic index dropped 2 points to 91.7 in August, its lowest level in nearly 10 years, compared with 91.8 estimated by economists.

The worsening economic outlook may boost speculation that Prime Minister Shinzo Abe will add fresh stimulus measures to counter the side effects of a sales tax increase on Oct. 1 and the ongoing slump in exports.

The index is one of Japan’s broadest indicators of current economic activity, drawing on measures including industrial output and shipments of consumer durable goods. The Cabinet Office uses it to help determine whether the economy is officially in expansion or recession.

The world’s third-largest economy is facing increasing headwinds from overseas as trade tensions and a slowdown in China’s economy slam its exports, though domestic demand has so far kept the economy growing. The Bank of Japan is carefully monitoring overseas risks and the side effects of the sales tax increase, as it prepares for its next policy decision on Oct. 31.

What Bloomberg’s Economists Say

“The declines in Japan’s business condition indexes in August signal the risk of a recession is rising -- our model, which incorporates the data, flashed a recession warning for a second month in a row. Even so, it’s still a tentative signal.”

--Yuki Masujima, economist

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--With assistance from Tomoko Sato.

To contact the reporter on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net

To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Paul Jackson

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