Ignore the GDP figures – Japan is doing just fine

Japan: still an exciting place to be

Today’s FT (written last night) took a look at what might happen today. On the release of Japan’s GDP data it noted that the “expectation is that the economy will rebound growing by an annualised 2.2% after an annualised 2.2% fall in the second quarter brought on by the consumption tax”.

It didn’t quite work out like that. The numbers today suggest that Japan’s GDP contracted by 0.4% in the third quarter of the year – an annualised fall of 1.6%. Whoops.

Today, the FT website is running through some of the dismal forecasts that made up that dismally wrong consensus number: Credit Suisse: +3.4%; Morgan Stanley: +2.8%; Bank of America: +2.5%; Barclays: +2.2%; JPMorgan: +2%; BNP: +1.6%. All this begs a few questions.

The first is why anyone bothers to make these kinds of precise economic forecasts, or pay anyone else to make them in the first place. Of the 29 forecasters who were surveyed about their views on this by Bloomberg, not one – not one! – forecast a negative number. The lowest one offered was 0.2%.

And the second is just how bad a state the Japanese economy is really in.

I can’t answer the first. It is going to have to remain one of life’s great mysteries. The second is easier, if only a little. The most obvious thing to say on it is that there is has almost never been an unrevised GDP growth number in any country anywhere (China might be a not particularly honourable exception to the rule).

These preliminary GDP numbers are well known to be unpredictable, and, as Jonathan Allum of SMBC Nikko says in his daily note: “if today’s numbers appear too bad to be true it may be because they are precisely that”. We will find out when the revised figures appear on 8 December. Until then, it is worth noting that, while these numbers are discouraging, they aren’t all bad – consumption did rise in the third quarter, for example.

At the same time, the corporate world seems to be doing just fine. Toyota has announced a rise in its forecast profits to a new high for a listed Japanese company, and Allum’s totting up of the latest round of quarterly results shows “decent” progress. If the yen keeps weakening (and if Japan keeps printing money, it will) that could turn into spectacular progress as it has already for Toyota: according to the Nikkei, every time the yen falls 1% against the US dollar, Japan’s big-company profits rise by 0.5%.

What next? Japan has been a pretty exciting place recently (the huge expansion of monetary policy and the plans for the Government Pension Investment Fund to buy endless equities kicked things off – see my previous posts and our brilliant cover story on the matter) and it looks like it is going to stay that way.

There is a conflict at the heart of the Japanese economic condition: the BOJ and Shinzo Abe desperately want inflation (to inflate their debt away), but Abe also needs to be seen to be acting in a fiscally responsible manner on taxation (to cut the deficit with real money). That means he has to choose between monetary credibility (keeping the printing presses on and stopping a return to recession) or fiscal credibility (pushing ahead with the next rise in the consumption tax).

Our guess on his choice is this Abe, on what Allum refers to as one of his “brief visits to his homeland” tomorrow, will announce both the widely expected deferral of the consumption tax, and a snap election.

He will choose temporary monetary credibility over fiscal credibility, just as the US and the UK already have. 


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