By Shigeo Kodama

TOKYO (MNI) – Japan’s government is expected by analysts to upgrade
on Wednesday its economic assessment based on the coincident composite
index for February, saying the index shows Japan’s economy is
“improving,” instead of its current view that it is “pausing.”

But they warn that the improvement will be short-lived as
industrial production, large industrial power consumption, and other
components of the index are expected to slump in March, hit by the March
11 earthquake and tsunami.

The coincident composite index (CI), which reflects current
business conditions, is expected to have risen about 0.7 point to 106.6
(against 100.0 for the 2005 base year) in February from January, posting
the fourth consecutive monthly rise, according to economists polled by
Market News International.

The Cabinet Office will release the February CI data at 1400 JST
(0500 GMT) on Wednesday, April 6.

In the monthly index report, the government has said the economy is
“pausing” every month since October 2010, when its view was downgraded
from “improving”.

If the February coincident index is in line with the MNI survey
median, the three-month moving average will rise by 1.40 points in
February from January to 105.3, a third straight monthly gain.

According to the government’s criterion, if the CI’s three-month
moving average rises for three straight months, it will automatically
revise up its assessment to “improving.”

But economists said the government may have to revise down its
assessment to “pausing” again in March, as the March CI is expected to
plunge in the aftermath of the March 11 disaster.

Some economists said industrial production, which has a major
impact on CI, could drop more than 10% m/m in March due to the disaster,
which has caused significant power shortages in eastern Japan.

Japan’s manufacturing purchasing managers’ index, which is closely
correlated to industrial output, plunged to 46.4 in March from 52.9 in
February in the aftermath of the quake, Markit Economics has said.

The 6.5-point drop in the March PMI was the largest on record,
surpassing the falls seen after the collapse of Lehman Brothers in
September 2008 and the U.S. terror attacks in September 2001, the firm
said. It added that the March PMI index was the lowest since 41.4 marked
in April 2009.

If the March coincident CI falls 10 points m/m, hit by an expected
plunge in industrial output, its three-month moving average will drop by
2.3 points m/m to 103.0.

The 2.3-point drop would be large enough to prompt the government
to revise down its narrow economic assessment based on CI to “pausing.”

To signal a “pause” in an economic cycle, the coincident CI’s
three-month moving average must show a cumulative shift in the opposite
direction by at least a full standard deviation in the past month or
three months (that is, by at least 0.68 point).

tokyo@marketnews.com
** Market News International Tokyo Newsroom: 81-3-5403-4833 **

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