Numbers show road to recovery fraught with inflationary risk

by Teruhiko Mano

The preliminary GDP figures Japan released May 18 show that the gross domestic product in the January-March quarter expanded 1.4 percent (5.6 percent annualized) in real terms over the previous quarter. Compared with the same period in 2003, first-quarter GDP grew a robust 5.4 percent. The GDP has now expanded for five consecutive quarters — an indication that the Japanese economy is already in the middle of a recovery phase.

On the other hand, it is still widely said that this sense of recovery is not being shared by most of the public, and that many people are continuing to advocate the use fiscal and monetary measures to support the upturn. Where is this gap between robust economic data and public skepticism coming from?

For one thing, the world of commerce is gauged by nominal figures. Sales are the aggregate of prices multiplied by number of units sold. Thus an increase in volume will not lead to higher overall sales if prices have declined.

This has been particularly true in Japan, where the hangover that followed the bursting of the bubble economy coincided with a global glut in supply. The decline in prices here was the sharpest among the major industrialized countries. What complicates matters even more is the way technological innovations and improved product capabilities are accounted for by the economic statistics. If, for example, a personal computer with double the data-processing capacity of the previous year’s model is sold at the same price as the old one, its price is counted as having been cut in half. In the January-March period, the GDP deflator pointed to minus 2.5 percent.

However, the nominal GDP figures for the January-March period show that the economy, by overcoming this negative factor, grew 0.8 percent over the previous quarter to achieve an annualized growth of 3.8 percent. The most recent corporate and consumer prices have risen by 0.2 percent compared with the previous month, and it is increasingly becoming lame to say, “Business is sluggish because of deflation.”

The Bank of Japan has said it will maintain its ultra-easy monetary policy until prices leave negative territory, and we should closely monitor how the central bank responds to any new trends.

Another thing is that, amid the structural changes occurring in the global economy, the gap between winners and losers is expanding ever wider. Each industrial sector has winners and losers — some companies enjoy record profits while others sink into the red. Here, the problem is not macroeconomic policy, but the microeconomic behavior of individual companies.

Here again, however, share prices are on the upswing despite the fact that losses are being recorded by less-successful companies.

GDP growth over the past five quarters has been led by the private sector, while contributions from public-sector investment have dwindled. Public-sector investment as a share of GDP has been steadily declining, from 7.3 percent in the first quarter of 2002 to 6.6 percent in 2003, and 5.5 percent this year.

On the other hand, private-sector capital investment as a share of GDP has risen from 18.1 percent in the first quarter of 2002 to 18.4 percent in 2003, and 20 percent in the latest quarter. This is proof that Japanese corporations have restructured their operations so they can absorb the relatively high cost of doing business here. Unlike the rapid growth spurts Japan experienced in the past, government-initiated macroeconomic measures no longer improve the performance of all industrial sectors. Each corporation and individual now has to act independently to survive today’s constant megacompetition.

The global economic environment is rapidly changing. The huge surge in materials procurement and shipping costs, exemplified by the ascent of crude oil to the $40-per-barrel range, will affect the downstream sectors of the economy sooner or later. This is why oil prices were a major topic at the recent Group of Eight finance ministers meeting and why U.S. Federal Reserve Board Chairman Alan Greenspan wants to hike interest rates.

The impact and the speed at which such changes hit will vary according to the structure of each nation’s economy. Since Japan lacks natural energy resources of its own, the impact will be quite serious and quick to arrive, and Japanese policymakers, it seems, will have to switch gears from deflation-fighting to guarding against inflationary risk.