As the Japanese economy struggles to grow, the country's leaders are starting to question their numbers. In August, the Bank of Japan released a study revealing a discrepancy between its gross domestic product estimate in 2014 (2.4 percent growth) and that of Prime Minister Shinzo Abe's Cabinet, which showed a 0.9 percent contraction. The study incited debate over the agencies' methodologies, and on Sept. 16, reports emerged that Japan's government plans to re-examine its methods for collecting the data it relies on. This could be good news for Abe, but it also highlights a larger problem facing the world's economies.
According to the Bank of Japan's study, the figures that the Cabinet used to calculate GDP were consistently lower than those that the central bank used. The variance is likely due to the diverging methods that the central bank and government use to calculate GDP. While the Bank of Japan derives its estimate from income data, including tax returns and companies' financial statements, the Cabinet uses consumption data, such as industrial and commercial statistics. Though, in theory, the end results of each method should be roughly equivalent, consumption taxes increased dramatically in 2014, and the hike could have affected the data that the Cabinet pulled for its statistics.
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Furthermore, Japan, unlike many other members of the Organization for Economic Cooperation and Development (OECD), has not yet adopted the United Nations' 2008 System of National Accounts and instead still uses the 1993 version. The outdated system could explain the Japanese government's low estimates; when the United States switched to the updated version in 2013, it increased its GDP projection by 3 percent. When Japan implements the new system, which it plans to do in December, its GDP figures will probably likewise rise. Since the 2008 System of National Accounts treats research and development spending — a major expense for Japan — differently than its predecessor did, the jump could be sizable. In updating the system, the Cabinet will also update its base year for statistics calculations by six years (from 2005 to 2011), another factor that should improve the government's projections. On Sept. 15, Abe's office demonstrated that the adjustment would boost its calculation for Japan's nominal GDP by 4.2 percent.
Abe — who rose to power on the promise of Abenomics, his strategy to stimulate growth in Japan's economy — would welcome the upward revision these changes could yield. In April, the government released long-term economic forecasts suggesting that the country would fall far short of the ambitious GDP target Abe set in 2015. Using the Bank of Japan's data, the country is only about 80 trillion yen (1 billion) shy — as opposed to 110 trillion yen, by the government's figures — of the 600 trillion-yen GDP Abe hopes to achieve by 2020. More important, by adjusting its collection standards and calculation method, the Cabinet and the country's policymakers will have a much more accurate picture of Japan's economy.
But the greater problem lies not in Japan's methods for calculating GDP, but in the statistic itself. As it was originally conceived, GDP is best used to measure output in terms of goods and their values. In modern economies, however, these parameters are no longer as useful as they once were. The service sector, for instance, is now an important part of the global economy and something whose value GDP cannot account for very well. Moreover, GDP struggles to accommodate changes in the qualities and varieties of goods, as well as growth in the sharing and digital economies. These changes are happening more and more quickly, making it harder and harder for statistical offices to keep up. Until GDP adapts to the new variables — or until economists devise a measure that does — Abe's office and statistical agencies around the world will constantly be playing catch-up.
"Japan: Government Re-Evaluates Its Economic Calculations" is republished with permission of Stratfor.
