Understanding Japan’s GDP: A Guide for the Perplexed

November 13, 2013, 4:16 AM

Understanding Japan’s GDP: A Guide for the Perplexed

MITSURU OBE

Japan on Thursday will release preliminary data for the third quarter’s gross domestic product. Economists expect the growth rate to have slowed to 1.7% on-quarter in annualized terms in the July-September period, from 3.8% in April-June. The data will serve as a progress report on Prime Minister Shinzo Abe’s economic policies, and provide a key input into discussions of next year’s budget. Strong numbers would mean the economic recovery remains on track, allowing the government to slowly shift its focus from short-term economic stimulus to medium-term fiscal consolidation. A medium-term fiscal reform target and a sales tax hike to 10%, both in 2015, already loom large in policymakers’ minds.–Private Consumption Seen Flat

Making up nearly 60% of Japan’s GDP, private consumption drove the economy’s sharp rebound in the first half of the year. That spurt had a lot to do with the January-May stock market rally, which spurred investment by private investors and increased spending on securities transactions. With the market essentially flat since May, that kind of boost can no longer be expected.

–Net Exports Seen as Major Drag

Net exports — calculated by subtracting import growth from export growth — appear to have become a negative contributor to GDP, from a positive one in April-June.

Consumer sentiment has brightened thanks to Mr. Abe’s bold economic initiatives, leading to a sharp increase in imports of iPhones and iPads. Meanwhile, export volumes have stagnated, especially to Southeast Asia and the United States.

–Business Spending Gradually Rebounding

An uptick in business investment, including inventory buildup, is expected to offset slowdowns in exports and consumption. Businesses have been running down inventories in the last three quarters, reflecting cautious business views about private demand. Economists think inventories have finally turned the corner and have started building up. Meanwhile, growth in longer-term commitments in the form of capital outlays will likely remain slow, highlighting the need for further efforts at deregulation, an issue Mr. Abe is now tackling.

–Public Sector Spending a Key Booster

Mr. Abe’s government approved a massive fiscal stimulus at the beginning of the year, equivalent to 2% of GDP, but only a fraction had been implemented by June due to a shortage of skilled workers. That means public sector outlays are likely to continue in the latter half of 2013.

–Deflation May Be Easing

The GDP deflator is a broad measure of inflation, covering both upstream (corporate goods and services) and downstream (consumer goods and services) prices. Since it includes volatile energy and food prices — items most affected by the sharp drop in the yen under the Bank of Japan’s aggressive monetary easing — the deflator may very well turn positive, according to economists.