Japan’s new GDP numbers look a bit puzzling:
Japan’s economy expanded the most in a year last quarter as consumer spending and export gains outweighed the weakest business investment since the wake of the March 2011 earthquake and tsunami.
Gross domestic product rose an annualized 3.5 percent, a Cabinet Office release showed in Tokyo. Private consumption, making up 60 percent of GDP, contributed 2.3 percentage points to the jump. The Bank of Japan may upgrade its assessment of the economy after a May 22 policy meeting, according to people familiar with the central bank’s discussions.
. . .
Annualized real growth exceeded all but two of 36 estimates in a Bloomberg News survey. Nominal GDP, which is unadjusted for changes in prices, rose 1.5 percent, also the most in a year. The nominal gain was 0.4 percent from the previous three months, less than the median forecast for a 0.5 percent increase.
On the plus side, it certainly supports my claim that faster NGDP growth in Japan would not merely lead to equally higher inflation. But as Matt Yglesias correctly points out, it’s almost too good for the demand-side framework. Faster nominal growth should boost both RGDP and inflation.
Still, I’d caution readers not to overreact to this data. Recall that in the 15 years before the 2008 recession, Japanese NGDP was basically flat (one percent RGDP and minus one percent deflator). The Japanese labor market had mostly adjusted to low NGDP growth, although I think money illusion near the zero nominal wage increase point had still modestly depressed Japanese employment and output.
If we use a standard expectations-based natural rate model, then a 1.5% NGDP growth rate in Japan is sort of like a 6.5% NGDP growth rate in the U.S., i.e., about 1.5% higher than “normal.” If America suddenly got a 6.5% NGDP growth rate for a single quarter, and it broke down as 1% inflation (i.e., 1% less than the normal 2%) and 5.5% real GDP growth, then I think most people would see that as a sign of robust AD, even though they’d be mildly surprised by the low inflation number. In other words:
1. Japanese data must be seen from the Japanese perspective, not the American perspective.
2. Quarterly results bounce around quite a bit.
I think this is modest evidence that Abenomics is beginning to work, but I also believe that Japanese RGDP growth cannot be maintained at 3.5% for any extended period of time. Still, faster NGDP growth also makes the debt situation in Japan slightly less catastrophic.