Sleight Of (Japanese) Hand

28th August 09 – Sleight of (Japanese) hand

On the (ever smiling) face of it, Japan as the world’s second biggest economy has joined Germany and France as the third of the G7 nations to climb out of recession. But we should be cautious in drawing the conclusion that this news heralds the worst of the crisis as past.

First up is the issue of arithmetic. Like Germany and France, Japan measures “nominal” GDP. This measure allows for the prices of goods as well as quantum and on that score a negative was still produced. In the second quarter of 2009, prices fell by 1.1% giving a nominal GDP of -0.2% compared to the headline growth figure of 0.9% on which the principal announcement of the end of recession was based.

Then there is the question of fluke. Japan’s bounce in the second quarter was due mainly to a huge programme of fiscal stimulus where Government spending and tax cuts cost about 4% of GDP. This programme is hardly sustainable in other than the short-term.

Finally, we should think about definition. The widely used definition of a recession and also of its end is two or more quarters of contraction and then pick-up. In the US, the National Bureau for Economic Research (NBER) has a far broader definition of what constitutes a recession and an end to that recession. Stephen Lewis of Monument Securities said on this subject, “We should note that, of the 10 recessions that the NBER has identified in the US economy since 1945, six included quarters when GDP had been higher than in the preceding quarter. It should be no surprise that occasionally, during broadly-based economic downturns, GDP should be higher in one thirteen-week period than in was in the thirteen weeks previously.”

Not wishing to over egg the pudding, it is also a fact that Japan’s economic activity is still 7.8% below the pre-crisis peak. If we care to smooth or de-sleight (something like the 200 day moving average chartist apply to shares), it is doubtful if the 3 “growers” are much different in practical terms from their counterparts in the US, UK, Italy and Canada.

Pearl of the week

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