Submitted by Jeffrey Snider – Alhambra Investment Partners
Like the initial or preliminary GDP report in Japan for Q3, the first revision caught almost every economist totally the wrong way. Expectations were for upward re-figuring which should have been taken as a contrarian signal. And sure enough, December’s revisions to Q3 GDP were in the opposite direction as expected, and for all the reasons that economists are “experts” in something other than the economy.
In recent days, though, many economists had predicted that the third-quarter contraction would actually turn out to be smaller than initially estimated—or perhaps be revised to flat or a slight expansion—after the Ministry of Finance reported late last month that according to its survey capital spending by businesses rose 3.1% during the quarter, compared with a previous estimate of a 0.2% decline. Business investment accounts for around 14% of GDP.
But capital spending turned out to be weaker than the ministry’s estimate when taking into account smaller businesses, declining 0.4%, indicating that even as Japan Inc. reports record profits and the stock market hits multi-year highs, the benefits of Abenomics haven’t reached everyone.
Instead of being revised from -1.6% to about 0%, the latest estimate is for GDP (seasonally adjusted annual rate of Q/Q) worse at -1.9%; not a small miss.
There is one common denominator among all monetary systems openly practicing orthodox methodologies and that is division. By that I mean bifurcation or, more precisely, stratification. Economists thought big businesses would be the engine of capital investment when in fact they are nothing more than the obvious and most direct “beneficiaries” of arbitrary redistribution. That is all that this is, namely the yen manipulation does not produce anything like economic advance only transference.
To orthodox theory that is fine, believing as it does that such arbitrary “pump priming” leads to greater and better conditions even after acknowledging taking into account the arbitrary creation of “losers.” The problem is that said “losers”, in this specific case small business capex, their response to such a monetary beating (and that is what the falling yen is doing to them) is not to increase production and activity but take decidedly negative actions of protection and prevention of further loss. This is only rational.
The degree to which that is the case goes back further in recent history than is being recognized by convention. The subheading for the article in the Wall Street Journal quoted above was, Revised Data Confirm Country Entered Recession in Third Quarter. It is possible that the wording was imprecise or overly blusterous, that is the nature of headlines vis a vis clickbait and reader draws, but unless they are talking about 2013 instead of 2014 the sentiment itself is just plain misleading. There is no way you can read even the flawed metric of GDP and come away with the conclusion that the recession just began.
It is plainly obvious that the Japanese economy fell into something like recession all the way back in the last months of 2013. With the first quarter of this year more than canceled out by the second quarter, Japanese GDP has been negative for a full year now. Beyond even that, the trend in GDP was already downward almost as soon as QQE was implemented as the Bank of Japan introduced the “inflation” that it still says it wants. As price changes became more severe (not “stimulative”) in redistribution the worse the Japanese economy has fared.
Given the interjection of Paul Krugman into this fiasco, the idea of the recession relating to the tax increase in April helps maintain the Keynesian status quo. Krugman’s main point of emphasis is that the global economy’s travails relate to “austerity” which Japan was in the midst of appearing to practice. So if the Japanese economy falls to recession via a tax increase, that lets both the Bank of Japan off the hook and allows this “austerity” myth to further propagate.
Again, it is perfectly clear that Japan’s problem is not austerity but redistribution. Arbitrary assignment of resources via currency manipulation is never going to end well no matter how much “certainty” is contained in the orthodox textbook. After all, these same economists never saw this recession coming and instead proclaimed a year ago unfounded certainty over a resurrection of Japan Inc. and its export-driven heyday. The opposite has taken place more than confirming that economists don’t really understand the economy.
“Declining real income amid a weaker yen suggests the recovery will likely lack strength,” he [Kenji Yumoto, an economist with the Japan Research Institute] said.
No, that is spreadsheet logic; “declining real income amid a weaker yen” does not suggest “the recovery will likely lack strength”, it totally disqualifies the idea of recovery in the first place. Unfortunately, that is exactly what happened in total defiance of all “inarguable” assertions from economists that QQE would lead to actual and sustained prosperity. In other words, economists have no idea what constitutes prosperity, explaining how PhD’s might actually appeal over and over again to redistribution. This recession in Japan, and severe too, is only “unexpected” because to them the economy is GDP, some number in an equation. An economy is true wealth, where incomes would rise in tandem with sustainable ascent; to deny the former is to deny the latter.