Monday, November 16, 2009

Not So Strong Japanese Recovery

The Japanese Cabinet Office today reported higher than expected quarterly real GDP growth of 4.8% at an annual rate in Japan, something which contributed to the global stock rally today.

Yet they also reported that nominal GDP growth was -0.3% at annual rate, meaning that the 4.8% real growth number assumed deflation as high as 5.1% at an annual rate. While the general price level arguably is falling in Japan, it is not plausible that it dropped that much between the second and third quarter. Indeed, the domestic demand deflator reported only 1.3% deflation, meaning that terms of trade adjusted GDP rose just 1% at an annual rate. This number is roughly in line with the 0.8% reported increase in gross domestic income.

In previous quarters, the terms of trade factor caused the decline in GDP to be exaggerated, and that is in fact also true for the four quarter (one year) change. But while output in Japan never dropped as much as headline GDP numbers suggested, the current recovery is also a lot weaker than the headline GDP number suggest.