Tuesday, November 14, 2006

Down is the New Up

Just when the view of the countryside looked grim, the boys and girls of the statistics bureaux post up some upbeat news:

Japan's Economy Expands at Twice Expected Annual Pace

By Lily Nonomiya -- Nov. 14 -- Japan's economy grew twice as fast as expected in the third quarter, spurring gains in the yen on speculation the central bank will raise interest rates next month to cool surging corporate spending.

Gross domestic product in the three months ended Sept. 30 grew an annualized 2 percent, the Cabinet Office said in Tokyo today. Second-quarter growth was revised to 1.5 percent from 1 percent.

Bank of Japan Governor Toshihiko Fukui said last week the central bank needs to act ``in advance'' to prevent the lowest interest rates among major economies from triggering excessive capital investment. The Nikkei 225 Stock Average jumped today on expectations the longest expansion since World War II will increase profits.

``We're seeing an increasing possibility that the Bank of Japan will raise rates'' as soon as December, said Ryutaro Kono, chief economist at BNP Paribas in Tokyo. Confirmation a slump in consumer spending was temporary and a quarterly Tankan business confidence survey that improves would be among factor that may influence sway a decision, he said.

The yen rose to 117.68 per dollar at 10:59 a.m. in Tokyo from 118.04 before the report. The Nikkei 225 advanced 1.6 percent, the biggest gain in more than five weeks. The yield on five-year notes rose 6.5 basis points to 1.225 percent.

Growth May Slow

The median forecast of 33 economists surveyed by Bloomberg News was for the economy to expand at an annual rate of 1 percent. The economy expanded 0.5 percent from the previous quarter, above the 0.2 percent forecast.

Since the end of the quarter, some data have shown that the pace of Japan's growth may be cooling. Bank lending slowed for a third straight month in October, and machinery orders, an indicator of future capital spending plans, had their biggest drop on record in the third quarter.

Capital spending in the quarter surged 2.9 percent, more than three times the 0.9 percent gain expected. Mizuho Financial Group Inc., Japan's second-largest bank by market value, and Tokyo Electric Power Co., the nation's biggest power company, announced plans this month to invest as the economy grows.

The gain in business spending more than offset a 0.7 percent decline in outlays by consumers, twice as much as the 0.3 percent drop expected. Expenditure slid amid a spell of bad weather that kept shoppers at home and as wages growth stalled.

First of all, that capital spending number really bothers me. If it is correct (and the authors of these numbers now say that GDP growth in the second quarter was half again as large as their original estimate--which is means they missed growth in economic output equivalent to the economic output of Sri Lanka during that period[measured on an exchange rate basis]) then producers must be thinking they will be able to work out their long-term profitability problems by ramping up production capacity, cutting prices and forcing out the weakest of their competitors.

Great plan...except, of course, it never works out that way. If the competitors are Japanese firms, they are bailed out by their keiretsu cousins. If the competitors are non-Japanese firms, they are bailed out by their home governments.

So the wheel of overinvestment keeps turning...

Secondly, is it possible we do not feel that the economy growing because it is shrinking?

The figures in the article above are for growth in "real GDP"...which, as we know, is a product of the deflator.

When one compares the "real" with the nominal GDP, the actual number of yen moving through the economy, one is hit with a bit of a shock:

in billions of yen

Real GDP:

05 Q3 134827
05 Q4 140745
06 Q1 135751
06 Q2 135968
06 Q3 138517

Nominal GDP:

05 Q3 123153
05 Q4 133037
06 Q1 123511.
06 Q2 127182
06 Q3 125490

Amaterasu! Please don't tell me they're fiddling with the GDP deflator again!

In the "real" figures, where somebody tries to guess the relative value of different products in addition plugging in the inflation rate, output increased by 2.6 trillion yen over the last quarter.

However, in the nominal world, that is to say the real world without the quotation marks, the value of output fell by 1.7 trillion yen.

OK, OK, OK--so these are not the seasonally adjusted figures...but still, a drop is a drop...unless you are in the "real" world I guess.

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