Wednesday, June 12, 2013

Saved By Deflation And The High Yen

Q: The Abe administration's economics team members are on record as being the enemies of deflation and a hard yen. Does that enmity persist when the evil twins make the Prime Minister look like a good steward?

On Monday, the image of the Abe economic program was boosted by two numbers:

- higher real GDP growth, with revised figures showing annualized growth of 4.1%, a big jump upward from a previously announced 3.5% (Link), and

- the current account surplus, which at 750 billion yen in April was double the April 2012 figure of 374 billion yen. (Link)

Funny thing about these positive numbers -- they are both conversions. Does the raw data still tell quite as salubrious a tale?

Take the real GDP figure. One would assume that an economy with an annual real growth rate of 4.1% has more yen it after a year has passed than it had before.

One would think that, yes.

However, the total nominal size of the Japanese economy -- that is to say the number of yen one can use to pay for things, like, let us say, interest on the national debt -- was, in the first quarter of 2012, 118.4 trillion yen.

A year later, nominal GDP in the first quarter of 2013 was...117.6 trillion yen.

Oh. Oh dear.

"Real" is a funny word in economic statistics. It makes sense for economies undergoing inflation, as asking citizens to "get real" keeps them from getting giddy about rises in nominal income. "The growth number may look big," the government is telling them, "but please remember you are paying more for stuff too."

In economies undergoing deflation, the entity in danger of going all giddy is the government. If  deflation is accompanied by negative nominal growth, the temptation for the government is to trumpet "real" to make what are on the surface smaller totals bigger. "Look, there is less currency in your pockets," the government says, "But thanks to deflation, that smaller total buys more stuff than before."

"Yes," Hiromi Q. Public says, "But what about the stuff I have already bought? How can I make the payments if the actual number of yen in my pockets is smaller?"

"Oh," says the government, "Oh that. Yeah, that's a problem. Sorry, that's gonna sting."

In the graph below, the blue and red bars show the different figures for the reported real (blue) and nominal (red) rates of growth in the first quarters of the last fourteen years.

Click on image to view in a larger size.

There are, as you can see, some very, very ugly numbers here. The drop in response to the Lehman shock (2009 Q1) is terrifying, in both nominal and real terms.

However, "getting real" -- that is converting the more swinging nominal figures into real, that is to say, theoretical yen is not, for the most part, misleading.

The figures for the first quarter of 2013, where a -0.6% loss in size becomes a 1.0% gain in value, are therefore notable for their potential to empower mendacity. The only comparable quarter is the first quarter of 2005, when the nominal economy shrank at a -0.8% but the government booked a 0.2% gain.

+ + +

In the trade release figures, there is a 100.8% difference in the current account total of April 2012 and April 2013.

Very impressive...except that these are not the same yen, are they?

Let us, for simplicity's sake, take the U.S. dollar as the surrogate for all the currencies of the rest of the world, the "rest of the world" being where this current account surplus was made and where it stays (the current account surplus being the amount a country adds to its net foreign assets).

Taking the figures from yesterday's government release, the current account surplus accrued in April 2012 was worth 4.68 billion dollars, using the conversion factor of 79.83 yen to the dollar -- the yen's value on 30 April 2012.*

Monday's announced figure, when converted at 97.52 yen to the dollar -- the yen's value on 30 April 2013 -- is 7.69 billion dollars.

Year-on-year growth in net income in dollars is a still impressive 64.3% -- but the growth is not the doubling recorded in the ledgers of this blessed land.

To get to 100.8% growth, you need a boost from last year's terrible hard yen.

In fairness to all, the valuation of a positive net foreign asset position in a fluctuating currency regime is alchemy, always.


* The choice of the value of the yen on 30 April is arbitrary -- but then the conversion figures used by government statisticians are approximations.

Data sources:


Current account

No comments: