Key Japan indicator paints better picture


As Japan's long hot summer continues, the outlook for the country's economic health looks brighter

Staff and wires

TOKYO, Japan (CNN) -- A key forward indicator of Japan's economic health has painted a brighter picture ahead, with a positive reading for the sixth straight month in June.

The government's Cabinet Office said Monday the June diffusion index of leading economic indicators was 70.0 on a scale of 100.

The preliminary figure is well above a neutral reading of 50,

That is good news for the world's second largest economy, which is struggling to break free of the recession that gripped the country for much of last year.

In June, Japan reported its economy grew 1.4 percent in the March quarter from the previous quarter. That equated to an annualized rate of 5.7 percent, and followed three straight quarters of economic contraction (Full Story).

But some analysts suggest the March figure may be a one-off spike, and that the June quarter -- due for release early next month -- could see a return to contraction.

Cyclical recovery developing


Japan's recovery so far has been led by exports, which are heavily dependent on U.S. economy health

Others, such as Tokyo-based chief economist for ING Securities Richard Jerram, believe a cyclical recovery is developing in Japan that will lead to growth of 0.6 percent in the year to next March.

Jerram told CNN recently that short-term exchange rate movements were unlikely to derail the coming recovery (Full Story).

The yen is trading at 119.2 to the U.S. dollar on Monday afternoon, after strengthening to 115 in mid-July -- a level at which it is thought to become a problem for some Japanese exporters.

This year's recovery has largely been led by growth in exports to major markets such as the United States, but recent softness in the U.S. economy has raised fears the growth spurt could falter.

Outside of the international context, Monday's release of the leading index is a pointer to economic conditions for the next few months. The index is compiled by using data such as the number of new job offers, consumer sentiment, Tokyo stock prices and the rate of inventories.

The Cabinet Office also revised May's index to 90.9 from a preliminary 90.0.

Weighed down by worries

While the index may point to better times ahead, Japan's overall economy is weighed down by worries over unemployment, corporate debts, slow progress over structural reform and low consumer demand.

Japanese wholesale prices were flat for the fourth straight month in June, and unemployment is unchanged at 5.4 percent, just below the postwar record of 5.5 percent seen in December 2001 (Full Story).

Industrial output dipped 0.7 percent in June from the previous month as exports lost some of their momentum.

The government also released on Monday the coincident index, which indicates current conditions and is calculated by using data such as industrial output, electricity use and retail sales. It fell to 77.8 from the previous month's 100.0.

The Cabinet Office revises the indices a few times before issuing final figures.

Japanese Prime Minister Junichiro Koizumi is keen to combine tax and spending cuts in a package to boost the country's economy.

But observers say he will continue to face heavy opposition to his restructuring proposals, which are seen as key to a recovery.

Reuters contributed to this report.