Confusion About Japanese Growth

May 28, 2008

Real GDP measures aggregate demand. Japan’s all-industry index calibrates aggregate supply. The two gauges should tell a similar story but aren’t doing so lately. GDP expanded 2.6% saar in 4Q07 and 3.3% in 1Q08. The all-industry index, in contrast, slipped 0.4% saar in the final quarter of 2007 and then slumped by 3.7% in 1Q08. A market vote of confidence in the optimistic scenario of GDP can be seen in the Nikkei, whose 16.3% increase since March 17 far out-distances a 4.7% rise in the DJIA and even gains of 13.8% in the DAX and 12.1% in the British Ftse. But officials continue to accentuate the economy’s downside risks, observing continuing sluggish public investment, slower private investment, flat industrial production and headwinds from higher raw material costs, global financial turbulence, and weaker prospects in foreign markets. In March, readings on the leading, coincident, and lagging economic indices were each very low at 18.2, 30.0, and 20.0. Exports increased 4.0% y/y in April, down from 9.9% in 2007, while import growth accelerated to 11.9% from 9.4%. The Shoko Chukin index of small business confidence, which correlates pretty well with personal consumption, has posted successive period averages of 46.4 in 4Q07, 44.8 in 1Q08 and 42.7 in April-May, and such has fallen to 42.2 as of May from 49.1 last September.



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