Huge miss on Japan GDP suggests more forecasting complacency

November 17, 2014

BWhile few people have had serious hopes for a prolonged Japanese economic boom for a long time, the range of forecasts provided for Japan’s recent economic performance gives you an idea of just how wildly unexpected the news was today that it is back in recession.

Out of 24 economists Reuters polled, the most pessimistic was for 1.0 percent annualised growth in the third quarter for the world’s third largest economy.

Instead it contracted by 1.6 percent. The highest forecast, which was not exactly calling for boom times at 2.9 percent, was nearly 4 percentage points too high.

While this was not the first time economists have wildly overestimated economic growth, a shock of this kind on the widest measure of a developed country’s performance hasn’t undershot by this much since the “Polar Vortex” threw the U.S. economy under a snowdrift at the start of this year.

So, does this signal that the world’s third largest economy is dangerously slipping away, just after yet another dramatic escalation of a securities purchase programme, one that which has been in place now for the better part of a generation?

It does at least give some explanation for the Bank of Japan’s decision to ramp up QE, even though that came through on the narrowest of voting margins.

What it also shows is that while monetary policy remains mostly impotent at the zero bound, fiscal policy still works. A sales tax hike implemented with an eye to boosting inflation has done damage to the economy by keeping domestic demand weak.

Some of the same economists who got the growth forecast wrong are now saying there’s not much to worry about because the surprise was largely down to an adjustment to inventories, which had given an unexpected boost in the first quarter.

Analysts at Credit Agricole conclude that the return to recession is “temporary.”

While we are not overly concerned by the fact that the economy was in technical recession up to July-Sept as we see it temporary, the fact that the economy barely recovered from the negative impact of the tax hike will mean so much to policy authorities.

What has not been at all temporary in Japan for two decades is the threat of deflation and recession.

One thing is for sure, the probability of another tax hike has just become even more unlikely.

Japan GDP


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