What does this year hold in store for the Japanese economy? Takumori Akiyoshi, chief economist at Sumitomo Mitsui Asset Management, explains why government and private-sector economic forecasters believe that a long-awaited upswing is finally at hand.
Indicators Point to Business Upturn
In the last quarter of calendar year 2016, the Japanese economy began showing clear signs of an upturn. On December 7, after almost a year and a half of ambivalent assessments, the government released a revised October report on indexes of business conditions and boosted its assessment to “improving.”
Contributing to the upgrade was an increase in industrial production, the single biggest indicator affecting the coincident index. Back in September, the Ministry of Economy, Trade, and Industry had noted a gradual improvement in output in its revised index for August, and the trend has continued. The inventory drawdown phase is over, opening the way for ramped-up production.
This was reflected also in the results of the Bank of Japan’s Tankan (Short-Term Economic Survey of Enterprises). The diffusion index for large manufacturing companies, a measure of their overall assessment of business conditions, rose for the first time in a year and a half, from +6 in September to +10 in December.
Consensus Economic Forecast
On December 19, meanwhile, the Japan Center for Economic Research published the results of its December ESP Forecast, based on a poll of 40 private-sector economists. On average, the forecasters predicted 1.19% real growth in gross domestic product (1.21% nominal growth) for fiscal 2016 (ending March 31, 2017) and 1.09% real growth (1.37% nominal) for fiscal 2017. They expect the year-on-year drop in consumer prices to bottom out in the July–September 2016 period, giving way to a modest increase in January–March 2017. The forecast for core inflation was –0.24% in fiscal 2016, rising to 0.73% in fiscal 2017.
Each year, the JCER evaluates the performance of the economists participating in the previous year’s ESP Forecast by comparing their responses with Japan’s actual performance vis-à-vis key economic indicators. On the basis of this information, it ranks each of the participants according to their accuracy. It also ranks the accuracy of the consensus (average) forecast relative to that of the individual forecasters. The results are surprising. Since about 40 economists participate each year, one would expect the consensus to fall at about fifteenth place in terms of accuracy. Yet in each of the 12 forecasts carried out between 2004 (when the surveys began) and 2015, the average has ranked between third place and ninth place, indicating a surprisingly high degree of accuracy. (In 2015, it ranked seventh.)
The December survey also asked for the forecasters’ prognostications on a few key external variables. With regard to real GDP growth in the United States, the consensus forecast was 1.59% in 2016 and 2.32% in 2017. It would seem that hopes are high for the infrastructure investment and tax cuts promised by President-elect Donald Trump. For China, the economists predicted fairly high, albeit declining, real GDP growth of 6.65% in 2016 and 6.37% in 2017. Based largely on this outlook, they predicted that external demand would contribute 0.0% to Japan’s GDP growth in 2017.
Domestic demand, according to the consensus, is likely to contribute 1.0% to growth in 2017. Personal consumption is expected to grow at a rate of 0.82% in fiscal 2017, up from 0.70% in fiscal 2016. The outlook for employment is positive, with unemployment expected to drop from 3.07% in fiscal 2016 to 2.94% in 2017. Where capital investment is concerned, the mean forecast predicts 1.36% growth in fiscal 2016, accelerating to 1.90% in fiscal 2017. The industrial production index is expected to rise from 0.65% in fiscal 2016—when the Kumamoto earthquakes threw a wrench in the works—to 2.18% in fiscal 2017.
According to the government’s second preliminary estimate, the economy grew at an annualized rate of 1.3% in the July–September quarter. This was revised down from the 2.2% posted in the first preliminary estimate, owing to changes in the seasonal adjustment and the adoption of new accounting methods accompanying rebasing (see below). Even so, it marked a third straight quarter of growth, something Japan had not experienced since the period ending in September 2013.
New Calculations Bring GDP Target Closer
With the recent base-year change from 2005 to 2011, the Japanese government has updated its method for calculating GDP, adopting standards that most Western nations have been using for some time. The inclusion of research and development expenditures under capital formation, among other changes, resulted in a substantial upward revision of nominal GDP for fiscal 2015 (see table).
Factors Contributing to Change in Nominal 2015 GDP After Base-Year Change (from 2005 to 2011)
|¥ trillion||% change||Main components affected|
|Overall change in nominal GDP*
(between old and new calculation)
|Conformance with 2008 SNA||24.1||4.8|
|Treatment of R&D as capital formation||19.2||3.8||Private non-residential investment, public investment|
|Change in treatment of patent services, etc.||3.1||0.6||Net exports in goods and services|
|Treatment of defense equipment expenditures as fixed capital formation||0.6||0.1||Public investment|
|Elaboration of ownership transfer costs||0.9||0.2||Private residential investment|
|Clarification of central bank output||0.2||0.0||Government consumption|
|Other adjustments: Incorporation of basic quinquennial data, development of new estimation methods (for construction sector output, etc.), switch from quarterly GDP estimates to annual estimate (for 2015 only)||7.5||1.5||All|
* Nominal GDP for fiscal year 2015 has been revised upward, from ¥500.6 trillion to ¥532.2 trillion, in conjunction with a base-year change from 2005 to 2011.
Source: Cabinet Office, Japan.
Under the new calculations, the seasonally adjusted nominal GDP estimate for the April–September period of 2016 is ¥536 trillion, the highest figure on record. Working from this figure, an annualized nominal growth rate of 2.3% would bring Japan’s GDP to ¥595 trillion by the second half of 2020 and ¥602 trillion by the first half of 2021. This is far more realistic than the 3% nominal growth that would otherwise have been needed to meet the Abe cabinet’s target of ¥600 trillion “by around 2020”; indeed, it is well below the nominal growth rate of 2.8% posted in 2015. Thanks to the adoption of up-to-date standards for national accounting, the first of Abe’s “three new arrows” for economic revitalization has a reasonably good chance of hitting its mark.
(Originally posted in Japanese on January 5, 2017. Banner photo: Market workers celebrate the New Year in kimono following a ceremony to kick off 2017’s trading at the Tokyo Stock Exchange on January 4. © Jiji.)
Chief economist, Sumitomo Mitsui Asset Management. Born in Tokyo in 1957. Earned his economics degree at Keiō University. Has been a senior researcher for Mitsui Bank (now Sumitomo Mitsui Banking Corporation) and a chief economist for Sakura Securities and Sakura Investment Management.