Japan's GDP growth from a different perspective

Dr. Richard Werner not only introduced the term "Quantitative Easing" in 1995 but also commented in books and articles on credit creation, money supply and central bank policy. His view on Japan's macro-economic performance and why PM Abe should stop issuing government bonds and consider alternative ways to finance the deficit. Economics | 27.08.2014 01:00 Uhr

Dr. Richard A. Werner, CEO, Profit Group (Providence Asset Management): "In the second quarter of this year Japan recorded its largest GDP contraction since the earthquake and tsunami hit in 2011.

Technical downturn - 

The single most important reason for the downturn is technical: demand surged in the first quarter (and the one before that) as consumers spent more ahead of a sales tax increase in April.

The main lesson from the data is that any focus on quarter-on-quarter seasonally adjusted (potentially annuallised) real GDP growth figures is wholly misleading. Looking at such data maximises the amount of potential distortions.

The first lesson in economics is that the truth is usually the opposite of what they tell you. For the decade until including the end of 2012 we had been told that Japan was doing ok, boasting 0.9% real GDP growth on average over the decade. Yet, actually Japan’s economy contracted by 0.4% on average during this decade.

What matters to businesses, employees and the government is, however, nominal growth, not so-called "real growth": investment, turnover and profits are in nominal terms, salaries and wages are in nominal terms, and tax revenues and revenues from bond issuance are all in nominal terms.

Real growth is nominal growth minus inflation ... what about deflation?

Add to the 0.4% contraction of nominal GDP growth the other major problem, namely of world-record deflation (averaging a whopping 1.3% over the decade), and economists will tell you, ‘real growth’ was plus 0.9% (real growth equals nominal growth minus inflation, hence in this case nominal GDP contraction plus deflation -- -0.4% minus -1.3% -- is, hey presto, positive real GDP growth).

So, revisiting the second quarter 2014 GDP we find that things were not really very bad at all when we consider year-on-year nominal GDP growth. Yes, consumption was flat on this basis, but nominal GDP expanded by a highly respectable 1.9%.

Recovery through credit growth

This recovery is due to an expansion in bank credit growth, since bank credit creation for GDP transactions determines nominal GDP (as we know from the Quantity Theory of Credit, see Werner, 1997, 2012).

PM Abe would do well to focus on this, and put other measures, such as fiscal stimulus, tax raises or so-called supply-side structural reform on hold, since these are all counter-productive.

(See also video on Credit Creation by banks)

Stop issuing bonds

The fastest way to boost nominal GDP growth and bank credit would be for the Finance Ministry to stop issuing government bonds, and instead fund the public sector borrowing requirement by entering into loan contracts with the nation’s banks.

This is in line with my original definition of ‘quantitative easing’ when I proposed it in 1995. This is of course also the best method for Greece, Spain and other European countries to reflate quickly and cost-effectively."

Link zum Economics Forum

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