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Just What is Going On with Japan?

Updated: May 19, 2022

As misses go, it was as bad as Chris Waddle's at World Cup '90.

I am referring of course to economists' estimates of Japan's third quarter growth. It didn't hit the post. It didn't even shave the bar. While average forecast was for GDP to rise at an annualised rate of 2.2%, the actual number came in at 1.6%.

"Oscar Wilde was onto something when he said that people who lived within their means lacked imagination"

To put this in perspective, economists somehow failed to account for £24 billion of economic activity, making Tesco's £250 million hole look like loose change.

There are two important questions here. First, why did economists get it so wrong? And, second, why are Prime Minister Abe's efforts to get Japan growing again not bearing fruit given all the monetary stimulus?

One article cited economists saying the surprise was down to an adjustment to inventories, which had provided a boost the previous quarter.


First, what happened months ago should already have been accounted for in economists' estimates for third quarter growth and second, it's not true.

Yes, inventories declined, but by less than the average for the previous five quarters. Nor was private consumption to blame, surprising in light of Abe's decision in the immediate aftermath of the data release to postpone the next sales tax increase. OK, it was a bit weaker than expected but within an acceptable range of error.

No, the big reason for the miss was business investment which, instead of rising by 4% on an annualised basis, fell 1%. This makes even more of a mockery of the economists' forecasts. While it might be hard to gauge exactly what individual consumers are doing, polling companies for their spending and investment patterns should be relatively easy.

So, economists did not cover themselves in glory with their forecasts, but their denial following the third quarter GDP announcement is even more galling. US President Harry Truman wanted onehanded economists, as his all said "on the one hand...on the other". Some might wonder whether you'd want even onehanded economists.

Which brings us to what is arguably the bigger problem: why is Japan so weak given all the money printing?

GPD growth is a function of workforce growth and productivity growth. I also think that growth requires some sort of risk taking culture, one like that in the US where so many are prepared to borrow money and live beyond their means Oscar Wilde was onto something when he said that people who lived within their means lacked imagination.

As a result of Japan's conservatism, it has fewer billionaires than Istanbul. Interestingly, Bank of Japan Governor Kuroda [on Tuesday] urged companies to boost investment, telling them that his anti-deflation policies would make hoarding cash a bad idea.

Japan is a highly developed country and as a result its scope to increase productivity is very limited As for population size, it is falling and its workforce at an even faster rate. Japan could address the workforce issue with immigration reform. Although this is part of Abe's third arrow, political debate on the subject has been noticeably thin.

Japan is within its rights to choose not to implement needed reform but, as investors, we can choose not to invest there.

Published in Professional Investor

The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.

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