Japan: Not Out of the Woods

My first reaction at seeing the headlines that the Japanese economy grew more than expected in July-Sept was excitement.

After all, the main news coming out of Japan has been gloom and doom recently (and see this).

But as Bloomberg points out:

The acceleration of Japan’s economy to the fastest growth pace in more than two years masked a slide in prices of goods and services that threatens to temper the nation’s recovery...

Sustained price declines threaten to curtail a corporate- profit rebound that’s already been insufficient to spur a rally in Japan’s shares this quarter. The report prompted Deputy Prime Minister Naoto Kan to say the government may outline an emergency-spending package as soon as today, adding that “I’m concerned we’re entering into a deflationary situation.”

“This isn’t sustainable growth and the government knows it -- that’s precisely why they’re talking about the GDP deflator,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo. “On the face of it, 4.8 percent growth is a positive for the Democrats, but they’re not reading it as a reason to abandon their economic policies”...

A report today showed that demand for services unexpectedly fell for the first time in four months in September, a sign that the effects of government stimulus measures may be fading...

“It might be a decade before the job market returns to the level of health we had a year or two ago,” [Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG in Tokyo, who used to work at the central bank] said. “The number of jobs may recover but not wages. It’s very fragile.”

And Nouriel Roubini does a great job of putting the Japanese GDP figures in perspective:

Overview: Japan's real GDP growth accelerated to 1.2% q/q (seasonally adjusted) in Q3 2009, up from 0.7% in Q2, and stopped contracting on an annual basis. 4.8% y/y growth in Q3 2009 ended a five quarter streak of negative annual figures, thanks mostly to inventory restocking and a modest contribution from fiscal stimulus-driven household consumption. However, as Japan remains in deflation, nominal GDP growth figures present a more realistic picture of the economy: nominal GDP contracted 0.1% q/q, 0.3% y/y in Q3 (seasonally adjusted)...

Export growth was steady at 6.4% q/q, same pace as the previous quarter.

Public investment no longer the fastest growing component of GDP. It decreased 1.2% q/q.

Private residential investment continued to plunge (-7.7% q/q, -27.5% y/y in Q3)


Private demand turned positive, up 1.0% q/q, 4.2% y/y, driven by consumption and commercial investment.

Gross fixed capital formation again decreased 0.3% q/q, 1.3% y/y.

GDP deflator slowed further to 0.2% q/q. Domestic demand deflator was -2.6% q/q.

Beyond Q3 2009

An inventory-driven rebound in exports to emerging markets may drive a cyclical recovery in Japan. However, a strong, sustained recovery is unlikely without a revival in domestic demand, which is currently on life support from fiscal stimulus packages. Excess capacity will continue to weigh on employment, dampening consumption. As RGE expected, fiscal stimulus lifted consumer spending in Q3 but the stimulus effect will fade going forward as public spending comes under strain from a heavy debt load.

Louise Curley of Haver Analytics: "It should be noted that the data are preliminary and some of the components, notably the change in inventories, is only updated during the 2nd preliminary release. Given the volatility and the large positive and negative contributions of inventory changes to total growth, as shown in the second chart, it is highly likely that the missing element in Japan's third quarter growth was due to inventory accumulation."

Takehiro Sato of Morgan Stanley: "Economic strength overseas could allow Japan to avoid a sharp retreat in October-December and January-March 2010...A modest second dip in the economy will be inevitable in the first half of FY2011 as the growth rate reacts to the drop in public investment...the second dip [will] be much shallower than...January-March this year."

Caroline Newhouse-Cohen of BNP: GDP growth may rebound slightly in Q2 & Q3 before a further fall in Q4. GDP should thus fall more than 7% in 2009, its sharpest fall on record. The drawdown in inventories is set to trigger an upswing in production and exports over the coming months before economic activity contracts again toward the end of 2009 due to weak domestic demand despite the fiscal stimulus.

Mitsumaru Kumagai of Daiwa: "Real GDP will decline 3.2% in FY2009 but increase 1.2% in FY2010. However, the possibility that Japan's economy will experience a lull from end-2009 will increase, partly due to public works spending running out of steam. In any event, Japan's economy is unlikely to see a full-fledged recovery before FY2010 when the US economy is expected to trace a firm uptrend."

In other words, deflation us so severe in Japan that nominal GDP is actually negative. And just as with the American economy, signs of recovery are due to massive stimulus, and when heavy government intervention ceases, the Japanese economy will probably contract again, especially given the huge drag from massive debt.

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