On Japanese Growth, Population, and the Yen

November 19, 2008

Japan official estimates of GDP have earned a reputation for inaccuracy. Data measurement is a problem that officials have worked on with some success. But reported growth rates still occasionally produce outsized surprises and subsequent revisions. While gross domestic product measures the value of goods and services in a specific period of time from the demand, that is spending, side, the all-industry index does the same from the supply, that is production, side. The two concepts should be roughly, but big disparities often occur. Last quarter, for example, real GDP edged lower at a 0.4% seasonally adjusted annual rate, while the all-industry index plunged 3.3% saar. The relative strengths of the two concepts reversed from the pattern in the second quarter, when the all-industry index rose 1.9% saar and GDP fell 3.7% saar. Taking the two quarters together, growth in real GDP between 1Q08 and 3Q08 was -1.9% saar, but the all-industry index fell less steeply, -0.7% saar. Japan’s recession is unlikely to end before late 2009.

Japan’s L-shaped business cycle in the 1990’s and into this decade is attracting much interest as a more likely prototype for what the United States might be facing than the Great Depression. Japanese real GDP between 2Q90 and 3Q08 advanced only 1.3% per annum on average, and nominal GDP during those 18-1/4 years advanced only 0.8% per annum on balance, as Japan grappled with a mild but persistent strain of price deflation. Japanese share values, measured by the Nikkei-225, is currently 78.7% below its end-1989 record high. Those thinking that an L-shaped U.S. business cycle would necessarily hurt the dollar should consider the yen’s experience. That currency is presently 57.3% stronger against the dollar and 45.3% stronger against the synthetic D-mark than its mid-1990 values.

1.3% per annum real growth in Japan since mid-1990 does not translate into the same degree of hardship that a similar real growth rate would imply in the United States because Japan’s population slowed to a crawl and began shrinking in 2005. Over the 17 years between 1990 and 2007, Japan’s population rose on balance by just 0.18% per annum, a percentage point less than U.S. population growth of 1.13% per annum. U.S. real growth needs to advance at a 2.3% per annum pace to impact the standard of living in the same way as Japanese growth of 1.3% per annum.

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