ニュース & インフォメーション

How healthy is Japan’s economy?

Michael Schramm, Member of the Regional Board, Commerzbank AG

This article was first published in DJW News 3/2016.

2016-07-17, 11:09

For more than two decades, Japan has laboured under a reputation for low growth, deflation and an ineffective monetary policy. In spite of the best efforts of “Abenomics” to spark an economic revival, the average growth of real GDP since 2000 has been just 0.7%. On top of this, the economy has shrunk in four of the last ten quarters.

On the face of it, the evidence is not encouraging. However, in spite of all the doom and gloom, Japan is once again the world’s third largest economy behind the United States and China, and a key market for Germany. A closer look at the background to some of the headline figures might explain this apparent disparity.

The prevailing perception that the Japanese economy has long been more or less stagnating turns out to be deceptive. Measured in absolute terms, GDP growth does indeed look unspectacular. But to avoid comparing apples with pears when comparing the performance of the Japanese economy with other countries, it needs to be borne in mind that GDP is produced by people of working age: i.e., the population aged 15 to 64. Seen in this light, Japan’s recent results look a lot more impressive.

The influence of demographic factors

Japan’s population has been steadily declining since the mid-1990s. Since 1995, it has shrunk by 9.6 million (-11%), a decline that is predicted to continue over the next two decades at a rate of around 0.75% per year. In terms of economic performance, the real lost decade for Japan was the 1990s. At that time, GDP per person of working age increased by just 11% compared with 23% in the US.

From 2000 to 2015, however, real GDP per head of the working age population in Japan grew by 25%, totally eclipsing the 15% growth achieved by the US over the same period. Because total population is crucial to aggregate demand,   this  calculation  probably  paints  an   excessively favourable picture of Japan. Even so, GDP in Japan per head of population has increased by almost 12% since 2000, compared with 15% in the US.

Exploding the deflation myth 

Japan has experienced slight but persistent deflation since the mid-1990s, with the inflation rate today remaining well below the central bank’s 2% target. However, detailed analysis once again reveals a more differentiated result. Japan’s core inflation – that is, inflation that does not include food and energy prices – has been increasing for a number of years.

The Bank of Japan (BoJ) is focused on a specific type of core inflation, which encompasses the recent sharp drop in energy prices and is likely to have created a distorted picture of inflation in recent years. A core index, which is closer to internationally accepted core rates, clearly indicates a rising rate of inflation. In February 2016, the consumer price index, excluding fresh food and energy, was 1.1% above the level reached in the previous year. Compared to the low point achieved in 2010 (-1.3% annual average), this is a perfectly respectable increase.

The Japanese central bank is still likely to ease monetary policy once again in an effort to weaken the Yen, which has strengthened since the beginning of the year. How-ever, the most recent inflation rates could yet be biased upwards, as they  are  based  on a 2010 basket and do not take into consideration the fact that consumers have ad-justed their spending in favour of goods that have become cheaper.

In August 2016, the inflation rate will be calculated on the basis of a revised 2015 basket. At the time of the last rebasing five years ago, the inflation rate ended up being corrected by -0.6%. When the new figures become available, the bottom line will probably represent a success in the fight against deflation.

Monetary policy

Although there is evident progress in the fight against deflation, it is still remarkable to see how aggressive monetary policy has needed to be to achieve this success.

The BoJ’s monetary base (cash plus demand deposits of banks with the central bank)  has  tripled  in  the last  three years. Over this period, the BoJ has bought significantly more government bonds than the government issued net. It now holds almost one third of all Japanese government bonds. This has led to a significant appreciation of the yen, which runs counter to the (unacknowledged) intention of the BoJ to drive inflation upwards by devaluing the currency. The 2% target thus remains ambitious and it is hard to see it being met over the medium term.

The sun is rising again 

After years of economic stagnation, detailed analysis shows that the land of the rising sun is increasingly on the path to new strength. Even though it has not yet reached that goal, the Japanese economy is demonstrably more powerful than its recent reputation. Once again, it is an exciting time to be doing business with the world’s third largest economy.

Source: OECD, Global Insight, Commerzbank Research Source: OECD, Global Insight, Commerzbank Research
Source: OECD, Global Insight, Commerzbank Research Source: OECD, Global Insight, Commerzbank Research
Source: OECD, Global Insight, Commerzbank Research Source: OECD, Global Insight, Commerzbank Research
Michael Schramm
Member of the Regional Board, Commerzbank AG
michael.schramm@commerzbank.com
www.commerzbank.com/international
Michael Schramm
Member of the Regional Board, Commerzbank AG
michael.schramm@commerzbank.com
www.commerzbank.com/international

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