Japan stagnation no more

The Cabinet Office has just revised the official GDP data in December to adopt the latest
System of National Accounts 2008 (SNA2008) international standards. The most significant change under the new methodology is that research and development costs are now recognised as capital expenditure. This revision has had the practical consequence of increasing Japan’s aggregate nominal GDP by over Y30tn. Thus, the 3Q16 nominal GDP figure has been revised up by 6% from an annualised Y506tn previously reported in November to Y538tn (see Figure 15). The Cabinet Office has, as a result of this revision, increased its official estimate of Japan’s potential growth rate from 0.4% to 0.8%.

The above revisions to the official GDP data also follow an extended discussion prompted by the publication of a BoJ research study last year, which employed a different methodology for calculating GDP than that traditionally used by the Cabinet Office (see BoJ working paper: Estimating Japan’s Gross Domestic Income Based on Taxation Data, December 2016. Japanese version was published earlier in July 2016). The BoJ study relied on data from the tax office while the Cabinet Office has traditionally estimated GDP by calculating aggregate supply and demand using a variety of statistical surveys. As discussed here last September (GREED & fear – Kuroda fading, 15 September 2016), based on the BoJ methodology Japan experienced a significantly higher growth rate over the past ten years than that recorded in the official data, most particular in fiscal 2014. Thus, under the BoJ methodology the economy expanded by 2.4% in real terms in FY14 compared with a 0.4% contraction based on the latest official data (revised up from a 0.9% contraction reported in mid-2016). Over a longer time frame the Japanese economy would have achieved average real GDP growth of 1.2% between 2004 and 2014 based on the BoJ methodology, not the 0.7% reported by the Cabinet Office (see Figure 16).

The above findings were embarrassing to the statisticians in the Cabinet Office, most
particularly as the weak data in 2014 provided the rational for Abe to delay a scheduled sales tax increase for the second time in October 2015. The sales tax is now due to be increased in October 2019. Meanwhile ongoing discussions between the Cabinet Office and the BoJ as regards the GDP data, discussions apparently requested by Abe, appear to be at least one reason motivating the latest revisions to the official GDP data. The result is that aggregate nominal GDP has now exceeded the previous high reached in 1997 (see Figure 15). This is another sign of easing deflationary pressures.

As also previously discussed here, yet another signal that life in Japan is not as grim as was the case ten and more years ago is the remarkable collapse in the suicide rate. Thus, the number of suicides in Japan peaked at 34,427 in 2003 and has since declined to 21,898 in 2016, the lowest level since 1994 (see Figure 17). It is not a coincidence that this data series peaked out in 2003 and has now returned to the levels prevailing in the early 1990s. It is even the case that the fertility rate has picked up in recent years, bottoming out at 1.26 in 2005 and since recovering to 1.45 in 2015 (see Figure 18). Indeed the Japanese fertility rate is now running above levels prevailing in Hong Kong (1.20), Singapore (1.20) and Korea (1.17). Meanwhile the Abe government’s target is to boost this to 1.8 in the medium term.

Source: ‘Riding the Donald’, ‘Greed & Fear’ Weekly by Christopher Wood, CLSA (February 23, 2017, pages 8-9).

Philosophically, it also tells us that it is next to impossible to divine the true state of the macroeconomy, much as The Absolute is unfathomable through rational methods of enquiry!

This is relevant to the current debate on India’s 3Q2016-17 GDP growth estimate where some inappropriate comparisons to China have been made. That is silly. In China,there is an official systematic attempt to mis-state GDP. In India, it is still about methods and not mala fide.

Take, for example, this paragraph on inflation calculation in the United States and Japan, from the same source cited above. Whether the country is in the throes of inflation or not is captured by how the statisticians account for rental costs:

The rental component in Japan probably understates inflation whereas, of course, in
America rising rents have been the key upward driver of reported core CPI inflation. This is because in Japan there is no allowance made for the depreciation of housing in the rental component whereas the opposite is the case in America. Thus, Tokyo CPI for rents, accounting for 24.5% of the Tokyo core CPI basket, declined by 0.6%YoY in January (see Figure 13), contributing an estimated negative 15bp to Tokyo core CPI deflation. By contrast, US shelter CPI, which accounts for 42% of the core CPI basket, rose by 3.5%YoY in December while core CPI rose by 2.3%YoY. Excluding shelter costs, US core CPI rose by only 1.3%YoY in January.

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