Is Japan Really in a Recession?

Yesterday and today the business news highlighted a story that Japan was now in a recession.  The media defines a recession as any time a country has two consecutive quarters of falling GDP.    The graph from the Wall Street Journal, seen at the bottom of this post, confirms that Japan’s GDP has shrunk over the last six months.  Based on the extensive negative press coverage Japan’s Prime Minister Shinzo Abe has called for early elections.  An important question needs to be asked.  Is Japan really in a recession?  There are three reasons why Japan’s economy is much healthier that the media portrays.   These three reasons strongly suggest to me that Japan is not in recession right now.

First.  the key point that most people miss when looking at the Wall Street Journal’s graph shown at the end of the post is the phrase “adjusted for the seasons and inflation.”  Typically, no one looks or pays attention to these notes, but in Japan’s case this is a HUGE issue.  All governments make an adjustment based on the season to their GDP numbers.  Seasonal adjustments are based on statistical models that try to smooth out the highs and lows that occur at regularly intervals, like the Christmas shopping season.  Seasonal adjustments are not perfect and are often quite inaccurate.  In the long run these adjustments do not matter because annual data have no seasonal adjustment, but an incorrect adjustment can make a good report look temporarily bad.

What actually happened in the Japanese economy?  Total GDP, without including the seasonal adjustment, in the 3rd quarter (July to Sept) actually rose by 1.0%, instead of falling (see Real Gross Domestic Product (original series) Amount).  Only after doing seasonal adjustment did GDP fall the -0.4% that was widely reported .

Second, GDP is not a single number but is comprised based on how people, businesses, the government and foreigners are all doing economically.  The key number for the typical person living in Japan is not how total GDP changes.  Instead, it is how much household consumption rises.  Household consumption shows how people are doing and excludes the other sectors.  Excluding the other sectors is important because most people really don’t consider themselves better off when their government buys a fleet of aircraft carriers, even though this will boost GDP.  The Japanese government’s seasonally adjusted GDP figures show household consumption excluding imputed rent rose by 0.4% and the not seasonally adjusted figures rose by 2.6%.  Both sets of figures show all people in Japan are spending more money, not less.

Third, Japan is getting older and the population of the country is falling.  For the last few years, the country’s population has been shrinking by 0.2% annually.  A 0.2% population reduction means every five years there are one percent fewer people in the country.  The news media states a country is in a recession when the absolute amount of GDP falls.  This definition only makes sense when a country’s population is stagnant or growing.  If a country has fewer people over time, the country’s GDP should naturally fall as the number of workers declines.  After adjusting for inflation, Japan’s GDP has not grown much over the past few years.  However, combining steady GDP with a falling population means each person living in Japan is producing more.  This is a great success, not a failure.

Why is the media sounding such a loud alarm?  Because bad news sells!  Portraying Japan as being in dire economic straits got me and many other people to read the stories and glance at the ads surrounding the stories.  An article with the headline “Japan is continuing to muddle along” would have been ignored even by most economists.

Japans GDP

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