Japan's Why Economic Health May Be Stronger Than Data Show - WSJ.com November 7, 2006 HEARD IN ASIA DOW JONES REPRINTS This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool at the bottom of any article or visit: www.djreprints.com. See a sample reprint in PDF format. Order a reprint of this article now. Why Japan's Economic Health May Be Stronger Than Data Show By SEBASTIAN MOFFETT November 7, 2006 TOKYO -- Just how weak was Japan's economic growth in the July-to-September quarter? Next week the Japanese government announces gross domestic product for the period, and private economists say they expect expansion of just 0.3% from the previous quarter, or 1% on an annualized basis. Some economists say they think GDP -- the widest measure of economic activity -- could even have contracted. Such a gloomy result would mean a second-straight weak quarter for the world's second-largest economy, which grew at an annualized rate of 1% from April to June. Weakness would disappoint Tokyo's stock market, where the benchmark index is around the same level as the beginning of the year and 7% below April's peak. But the data may not be telling the whole story. Most economists say they agree the economy went through a soft patch, but they say government figures are exaggerating the gloom and that the economy probably is already picking up speed in the current quarter. The confusion surrounds Japan's consumption data, which are often revised later, giving a wildly different picture of the economy. Consumption accounts for some 55% of Japan's GDP and so is by far the biggest determinant of how much the economy grows. This time, economists say they expect the data to at first show consumption to have fallen, subtracting from GDP growth. Some of the numbers used to calculate the consumption component of GDP come from a government survey of household spending, and this figure has been falling. In July, it registered a 1.3% decline from the same month the previous year. In August it fell 4.3%, and in September, it dropped 6% from a year earlier. A bit of this gloom makes sense, economists say. The limp stock market makes people feel less wealthy and discourages spending. Fuel prices were high during the quarter. The weather was bad: In July, Tokyo had a total of just 59 hours of sunshine, compared with an average of 172 in recent years. Less sunlight can mean people spend less on the kind of things they normally enjoy during the summer, such as clothes, ice cream and trips to the ocean. The bad weather also pushed up vegetable prices, leaving people
with less to spend on other things. Economists say the picture isn't as bad as the government data make out. Unemployment in Japan has hovered around 4.1% since February, the lowest average level since 1997, and more people are looking for work, now that the Japanese seems economy to be growing steadily. Growth means the Japanese as a whole are earning more than before, which would normally lead to stronger consumer spending. "The weak consumption recorded by the erratic household-spending survey does not look credible," says Richard Jerram, economist at Macquarie Securities. The problem, according to Mr. Jerram and others, is that the household-survey data yield bizarre results. Partly that is because the sample of households is too narrow. It could also be because the survey is excessively detailed, making it hard for the households to keep track of their spending. Instead of asking how much people spend on food, for example, it has 10 categories just for root vegetables -- including separate entries for onions, bamboo shoots and lotus roots. As a result, says Masaaki Kanno, economist at J.P. Morgan: "The weakness is real ... but the numbers are far weaker than the underlying strength of consumption." Economists say the government's later reports of GDP for the quarter will get nearer to reality, as other consumption data become available. At least there isn't any controversy over one part of the Japanese economy -- exports, which are expected to contribute 0.3 to 0.5 percentage point to any growth announced next week. During the past year or so, imports grew faster than exports because of strong consumer spending, sapping growth in domestic production. Exports have been recovering this year as high gasoline prices in the U.S. generate demand for fuel-efficient Japanese cars. Longer term, too much dependence on exports for growth could be risky, especially if growth slows in Japan's main export market, the U.S. Barring a shock, most economists say Japan should keep growing over the next year ...