Prime Minister Shigeru Yoshida joked almost 70 years ago that if Japan had kept better data, it might never have started a war with the U.S. His grandson, Finance Minister Taro Aso, worries about flawed statistics that could mislead economic policymakers today.
While Japan isn’t alone in questioning the reliability of data, the stakes are rising again as the Bank of Japan forges on with its record stimulus program and debate rages over whether the economy can withstand another sales tax hike, planned for April 2017.
Investors also have been led astray, notably by revisions to growth figures. Last year, initial gross domestic product data showed Japan falling into recession in the third quarter, which pushed down stocks and the yen on the news. Three weeks later, revised data showed the economy actually grew 1 percent.
“The poor quality of data has long been a problem and, if anything, it is worsening,” said Richard Jerram, chief economist at Bank of Singapore Ltd., who has analyzed Japan and other Asian economies for more than 20 years. “It is hard to set fiscal or monetary policy if you do not have a reliable view on the recent performance.”
This recent data isn’t the first instance of such a large change, with quarterly GDP over the past 10 years being revised an average 1.7 percentage points from when it was first released. The Cabinet Office is “sloppy” in its calculations, Aso recently joked to economy minister Akira Amari, who runs that department.
While economic indicators such as confidence surveys, corporate profits and labor market measures suggest the economy is doing fine, “GDP is just noise,” Jerram said.
“Consumption tax receipts have been much stronger than expected, even as GDP data showed private consumption was much weaker than the government’s forecast,” said Hiroshi Shiraishi, an economist at BNP Paribas SA in Tokyo. “This raises the question whether consumption in the GDP data may have been under-measured since 2014.”
Here’s a list of the problems:
Aso has questioned if the private consumption data is under-counting how much people actually spend. In a submission to the government’s economic policy committee, he noted the overrepresentation of elderly consumers in the sample, and pointed out the increasing divergence between demand-side spending data and supply-side retail sales data. Economists have said the sample size is small.
Labor survey (wages)
One of the government’s and BOJ’s main aims is to get companies to raise wages. If the data is unreliable, then it’s hard to see how successful these policies have been. Aso pointed out that a change in the sample of companies surveyed may have caused the data to be discontinuous, raising questions about its accuracy.
The initial reading of GDP uses supply-side industrial production data, and this is then combined with demand-side statistics on capital spending when GDP is updated a few weeks later. These changes partly caused the third quarter’s GDP to be revised upward. Economists suggest the government release demand-side data earlier so it can be included in the initial GDP announcement.
Consumer price index
Online shopping made up 2.1 percent of retail sales in Japan in 2014, according to the trade ministry. However, most prices at online stores such as Rakuten Inc. may not be included in the CPI data, Aso said, raising questions about the accuracy of this essential data.
The government is looking to improve the quality of its statistics. A committee is examining some data, including household spending, wages and capital investment, and is set to compile a report in March.