The Numbers In Japan

What is economic growth? This isn’t an easy question to answer. Most people might respond with a reference to GDP. That wouldn’t necessarily be an incorrect one, but it may not be exactly on point, either. GDP was developed in order to try and assess economic growth, and over the years has simply become a stand-in for it.

That’s true of many economic statistics. If the numbers are positive, without further contemplation we take that as growth. All these figures and estimates were developed with those same assumptions – that if a broad survey of them all kept up positive numbers that would be consistent with growth. GDP was intended to capture the widest possible view.

This is one of the biggest problems over the last eleven years. You didn’t have to argue with people about late 2008 and early 2009 – everyone knew what the economy was doing. The fact that GDP or another statistic like Industrial Production was collapsing (didn’t matter in which country) simply matched perceptions.

We’ve whittled down these accounts to these small changes. In the grand scheme of things, even the contraction in 2008 and 2009 was a small thing; or it should have been. Recessions, even “great” ones, are painful only in the present tense. There are supposed to be quickly forgotten, the negatives all go positive and away we go.

Economic growth, then, is consistency. Sure, the economy may stumble into recession, that’s only natural. But if it only grows occasionally here and there, that’s worse than recession. Positive numbers aren’t necessarily consistent with economic growth, and those who designed the statistics never envisioned that there could be something other than robust growth or temporary contraction.

This sad case has been pioneered in Japan, spreading and infected the whole global system. The numbers, at times, look good even over there. And when they do, the Japanese people hear about it endlessly from the government and the government’s Economists. When they don’t look good, officials change tense and talk about the future. Back and forth they all go.

While most of the rest of the Governing Council of the Bank of Japan was in the former mood late last year, one member of BoJ’s Policy Board decided to tackle the matter more directly. As inflation hysteria gripped the mainstream media throughout the world with the Fed seemingly more confident and then both Europe and Japan’s economies (the sick children of the world) being talked about glowingly for a change, most central bankers wanted to focus on only that. They were being vindicated, they wanted everyone to know.

In early December 2017, Haruhiko Kuroda, BoJ’s Governor, started a speech in Tokyo by referencing the global economy with just that thought in mind. “With regard to the outlook for the global economy, both the advanced and emerging economies are projected to continue growing in a well-balanced manner.” The day before, visiting with business leaders in Hyogo, Takako Masai told them, “In terms of the outlook, advanced economies are projected to continue growing steadily, and a recovery in emerging economies is likely to take hold on the back of the steady growth in advanced economies and the effects of policy measures taken by emerging economies.”

There is a reason Japanese like German central bankers often begin their economic assessments outside of their borders. Their economic situations are in large part determined by the conditions of their trade partners. If the global economy is doing well, then the Japanese people can celebrate. An economic acceleration for everyone would be a success story for Economics, because central bankers everywhere including those in Japan have been doing the right things.

Yutaka Harada, our Policy Board member in question, was speaking in Fukushima the week before Kuroda and Masai gushed about the world economy. Harada was somewhat exasperated with the Japanese people given the mainstream view of the situation in late 2017.

It is often claimed that, although the government says that the economy has improved, the public is not actually experiencing this improvement in their daily lives. However, how should we measure the public’s perceptions regarding their daily lives in the first place?

Even the way he phrases the disagreement gives away the obvious bias; “the government says the economy has improved, but the public is not actually experiencing this improvement.” Might he instead ask himself if in the first place there is actually improvement? The people say “no”, why is that answer not taken seriously?

Japanese industry was on fire at the time (at least, in terms of the last ten years). IP was growing by 5 and 6%. For BoJ officials and the Japanese government, this was evidence of economic improvement both in Japan as well as globally. The Japanese were rightly skeptical. They’ve seen these positive numbers many times before.

You’re not allowed to disagree with Economists and their assessments, especially those working in official capacities. According to them, if it’s not happening today then it will happen tomorrow so brighten up and get with their program! Every positive number is taken out of context and remeasured to fit that future picture.

Harada’s answer to a doubting Japanese public was to blame some sort of cultural standard for innate dourness among Japan’s people. Even when growth was universally excellent, as in the 1960’s when GDP roared consistently by 10%, he claimed these opinion polls conducted by the government’s Cabinet Office were never all that good (before 1991 they were worded a little differently, which was only pointed out in the footnotes to Harada’s speech).

Ignore the polls, the ingrained modern skepticism, Japan’s cultural malaise, and its demographic suicide, IP was positive again! All those past interruptions were just the bad luck of thirty years of transitory factors strung one after another. This time in 2017 the plus signs would mean something. 

Economists have evolved into mathematicians with no natural feel for how an economy works, or even what’s going on in it. You would think they would be better with at least the numbers – realizing what compounding means in the long run, and therefore the absolute necessity of consistency. That means, growth isn’t a quarter or even a year or two of positive numbers here or there.

That means making sure that when the economy starts to get back up it stays up without being interrupted again another time. Therefore, figuring out these interruptions.

In short, time matters. Every time the economy stumbles in estimates as well as facts on the ground it is in contraction. They may not be negative numbers all the time, but in the space of time and lost opportunity persistent economic faltering is worse than recession.

Japan’s economy is indeed a reflection of global conditions, as well as the fatal conceits of its monetary and economic officials. Japan’s Ministry of Economy, Trade, and Industry reported earlier today Industrial Production was weak again in August 2018. IP was up on the month (seasonally adjusted) by a small amount, the first positive after three months of negatives.

Year-over-year (unadjusted) IP gained almost nothing, up just 0.6%. The trend  is pretty clear at this point, and it’s not going to put the Japanese people in any mood to blindly believe Economists. Get ready Mr. Masai for Kuroda and other colleagues to begin changing their speeches around again. Enthusiasm about global growth will have to be shifted once more into purely the future tense. Economists may not be able to appreciate what these up and down cycles mean, but the Japanese people sure do.

They aren’t alone. One step forward, one step back in a non-linear world is actually one step forward, two steps back. This math just doesn’t work despite the occasional clump of positive numbers.