JAPANESE PHANTOM GROWTH
by Kurt Richebacher
Lately, international investors have become enthusiastic
about Japan's economy and stock market.
Several American investment banks have trumpeted that the
turnaround of Japan's economy has arrived. Foreign
investors have been pouring money into Japanese stocks,
boosting the yen in the process. Officially, Japan's real
GDP grew in the second quarter by a sensational 3.9%,
beating America's growth rate of 3.3%.
Our knowledge about Japan's economy comes exclusively from
the monthly reports of its central bank, the Bank of Japan.
Its September report stated:
"Economic activity still continues to be virtually flat as
a whole, although signs of improvement have been observed
in such areas as the environment for exports. With regard
to final demand, business fixed investment is recovering
gradually.
"Meanwhile, private consumption continues to be weak,
housing investment remains sluggish, and public investment
is declining. Net exports are virtually flat. Industrial
production continues to be basically level in response to
these developments in final demand, and corporate profits
are on a moderate uptrend."
This hardly reads like the description of an economic
recovery. But how to reconcile this dismal description of
the economic situation with the officially reported stellar
real GDP growth rate of 3.9% for the second quarter?
Putting it bluntly: It is exactly the same statistical hoax
as the 3.3% simultaneously reported for the U.S. economy.
Japan's statisticians have learned from their American
colleagues how to conjure up the perception of an economic
recovery that does not exist.
Yet in Japan's case, there were some critical comments in
the press. A report in the Financial Times quoted an
economist as saying that "the government deliberately
manipulated statistics" using in particular an "incorrect
measure of deflation."
This, in turn, provoked a reply from the head of the
Japan's Department of National Accounts, a Cabinet Office.
In his letter to the FT, the director explained that the
"basic price statistics used in Japan's GDP deflators, such
as the consumer price index and corporate goods price
index, adopt the hedonic method to track price changes
accompanying quality improvement in it goods" - stressing
that this is common international practice.
To be precise: Just like the practice of annualizing
quarterly numbers, this is an American, not an
international, practice. Without the annualization,
reported real GDP growth would have been 1% in the quarter,
and 3% year-over-year. In today's world of sluggish growth,
that would also be impressive, if its main source was not
hedonic pricing of computers. Under its impact,
nonresidential investment grew 4.7%, or a stunning 20.2% at
annual rate.
Measured in current prices, a radically different picture
emerges: Japan's nominal GDP grew during the quarter by a
dismal 0.3%, or 1.2% at annual rate. Year-over-year, it was
up 0.5%. Repeating the first sentence of the above citation
from the Bank of Japan: "Economic activity still continues
to be virtually flat as a whole."
Assessing the Japanese economy's performance and prospects,
there is a broad choice. If you want to see an economy and
a stock market powering ahead, focus on the 3.9%, as
measured in real terms and annualized; if you want to see
an economy that remains stuck in the post-bubble aftermath,
focus on the 0.3%, as measured in nominal terms and without
annualization.
Such a vast difference in measured economic activity is, of
course, laughable. One of them must be completely out of
whack with economic reality. For us, there is no question
which one - the 3.9%. It has two main statistical sources
that we regard as outright phony: first, annualized
quarterly figures; and second, a very low GDP deflator.
Take these two statistical gimmicks away, and you end up
with the earlier mentioned mini-growth rate of 0.3% in
nominal terms for the second quarter. From the above
citations of the Bank of Japan, we conclude that it, too,
favors this measure.
But which of the two is the better measurement of economic
activity? "Real" figures attempt to measure the physical
volume of goods produced and sold in the economy by
adjusting nominal figures with calculated inflation rates.
Falling prices essentially increase real GDP growth, and
rising prices decrease it. By contrast, the nominal figures
simply add up the amount of money that has been spent on
various demand components.
We have to say that we are principally opposed to
translating falling prices into rising real GDP growth. It
corresponds, of course, with the opposite practice to
deduct inflation rates from nominal GDP growth.
Mechanically, both seem equally logical, but economically,
this equal treatment makes no sense. Consider that the
steeper the fall of prices, the higher the economy's real
GDP growth rate.
For us, the decisive consideration is that the real figures
tell us nothing about the movements of incomes and profits.
These only show in nominal figures, based on money
transactions. This may have been less important in times of
high inflation, but in our time of protracted economic
sluggishness, the money measure is far more important than
the volume measure. |
