Monday, September 10, 1999
The Economic Planning Agency's September 9 announcement that the Japanese economy grew a real, seasonally adjusted 0.2 percent from the previous quarter in the April-June period (0.9 percent annualized) came as a surprise to analysts who had expected a small decline. As such, the experts had been too pessimistic for a second straight quarter; few had expected that the economy would surge 2 percent in the first quarter. (The statistics will be the subject of an article in the JEI Report No. 35, available September 17. See also http://www.epa.go.jp/)
The surprising data had an immediate impact on currency and other markets. It was credited, for example, with pushing the yen to a three year high against the dollar. More generally, consumer and business confidence, which had been on the mend already, received another boost.
As happened three months earlier, hope threatened to overwhelm reality. The data revealed that the Japanese economy remains extraordinarily weak. Without private- and public sector inventory accumulation, gross domestic product would not have grown at all. And inventory accumulation can signal that companies to scale back production. In other words, EPA's numbers would have been more encouraging if they had shown no inventory accumulation and zero economic growth.
Of course, the weakness of the economy suggests that enormous growth potential exists. Capital spending accounted for the smallest percentage of GDP since the second quarter of 1985. Despite the 16.1 percent (82 percent annualized) jump in residential construction from the first quarter, the latest figure was lower as a percentage of GDP than any comparable figure recorded between 1962 and 1997. The historically low importance of capital expenditures and residential construction comes a at a time when both interest sensitive sectors would normally be benefiting from interest rates, which remain exceptionally low. Their weakness also suggests that both sectors have enormous room to grow.