This story is from December but I completely missed it. It’s highly relevant to us in America, though, and I’ll explain why shortly. Via Bloomberg Markets:
Japanese Prime Minister Fumio Kishida apologized for the government’s mishandling of economic data after media reports said it overstated construction order figures, a key numbers set used to calculate economic growth, for years.
“This is extremely regrettable and we need to examine how it occurred to ensure it doesn’t happen again,” Kishida said in parliament Wednesday.
The transport ministry had been double counting some data in its monthly construction orders survey, public broadcaster NHK reported, citing unidentified people familiar with the matter. The monthly release of orders from some 12,000 contractors is of particular importance for the government given that it feeds directly into the calculation of gross domestic product.
The overstating of the data goes back as far as eight years, according to the Asahi newspaper. Kishida said in parliament the ministry has corrected last year’s figures. It’s not the first time the government has mishandled data — the health ministry published erroneous wage figures in 2018, leading to a massive reassessment of other economic releases.
Japan said in 2019 it would review the handling of all its economic statistics after incomplete wage data saw it shortchange some 20 million welfare recipients by around $525 million in total.
While it’s still unclear how much data revision may occur this time from the overstated construction figures, economist Harumi Taguchi at IHS Markit said developments point to strains in Japan’s system to collect statistics.
“We’ve already had this problem in the past with wages data, but we need to ask why do these things happen, how was it not noticed for so long, and why haven’t past problems led to improvements,” said Taguchi. “Unless the country becomes really serious about this, the system will face institutional fatigue.”
It seems as if the Japanese government has been cooking the books. I don’t think this was an accident.
I think it’s because the government is under pressure to make it look as if its fiscal and monetary policies of the past 20-30 years–which have entailed massive amounts of QE and debt accumulation–have not been massive failures.
Japan currently has the highest public debt-to-GDP ratio in the world at 257% of GDP. You thought the US was bad at 133%? Japan is almost twice as bad as we are in terms of its debt load.
But don’t worry: we’ll be where they are someday soon. After all, we (and most of the developed world) are following in their footsteps in terms of economic policy.
The Japanese were the inventors of the policy of Quantitative Easing. They had a financial crisis in 1997, and in order to jumpstart their economy after a sluggish recovery–and with interest rates already near zero–they came up with the idea of QE, where the central bank prints money out of thin air and uses it to buy bonds from large banks, thus keeping interest rates low (increased demand for bonds means bond prices go up, which drives bond yields down) and also, in theory, injecting liquidity into the economy.
The Japanese were the first to slash interest rates down to zero, and the first to implement QE. It hasn’t worked for them–their economy barely grows at all–but for some reason we decided to try it ourselves.
You can see from this chart, which shows Japan’s quarterly GDP growth rate along with their primary interest rate, that Japan’s economy has barely been able to stay above 0% growth rates for 20 years now, even as interest rates are at rock bottom:
And now we learn that they’ve been cooking the books on their GDP figures–the GDP figures shown on this chart are overstated for at least the past 8 years.
Imagine how much worse things really are.
But again, the government of Japan is probably compelled to cook the books with their GDP figures because the truth would make it plain as day what an abysmal failure their economic policies have been for the past 20 years–policies that both America and Europe have copied.
The reality is, having a high debt-to-GDP ratio is terrible for your economy. A World Bank study from 2013 found that developed countries with debt-to-GDP ratios over 77% experience slower economic growth–and the higher your debt-to-GDP ratio gets above 77%, the more of a drag on your economy your debt is:
Public debt has surged during the current global economic crisis and is expected to increase further. This development has raised concerns whether public debt is starting to hit levels where it might negatively affect economic growth. Does such a tipping point in public debt exist? How severe would the impact of public debt be on growth beyond this threshold? What happens if debt stays above this threshold for an extended period of time?
The present study addresses these questions with the help of threshold estimations based on a yearly dataset of 101 developing and developed economies spanning a time period from 1980 to 2008. The estimations establish a threshold of 77 percent public debt-to-GDP ratio. If debt is above this threshold, each additional percentage point of debt costs 0.017 percentage points of annual real growth. The effect is even more pronounced in emerging markets where the threshold is 64 percent debt-to-GDP ratio. In these countries, the loss in annual real growth with each additional percentage point in public debt amounts to 0.02 percentage points. The cumulative effect on real GDP could be substantial. Importantly, the estimations control for other variables that might impact growth, such as the initial level of per-capita-GDP.
So for every percentage point above 77% that your public debt-to-GDP ratio reaches, you lose 0.017 percentage points of annual real economic growth.
Some quick math tells us that Japan, with its 257% debt-to-GDP ratio, is losing 3.06 percentage points of real GDP growth every year. In other words, if Japan were suddenly able to get its debt-to-GDP ratio down to 76%, its GDP growth figures would be 3.06 percentage points higher.
Japan’s GDP is currently about $5.058 trillion, which means that they miss out on $154.8 billion per year of economic growth due to their excessive public debt-to-GDP ratio. And this doesn’t even include the amount of money “wasted” each year paying interest on that debt.
(If you are curious, for America, with our 133% debt-to-GDP ratio, that translates to 0.952 percentage points of lost GDP every year, which in dollar terms, given our GDP of $20.936 trillion, comes out to about $199 billion in lost GDP per year. Plus we pay over $500 billion a year in interest on our public debt.)
No wonder Japan is cooking the books on their GDP figures. I mean, it’s already plainly obvious to anyone that their economic policies have failed, but if they weren’t cooking the books, the evidence of failure would be overwhelming and undeniable, and it would probably mean they’d face public pressure to implement major changes–like abandoning QE and hiking interest rates back up to a normal level.
But they can’t do that because they have such a staggering amount of debt that any meaningful interest rate hikes could bankrupt the whole country. Plus, if the Japanese–again, the inventors of QE and the pioneers of the permanent rock-bottom interest rates approach–were seen publicly giving up on the economic policies they’ve pursued for the past 20+ years, it would become clear that both America and Europe are also pursuing undeniably terrible economic policies as well, because the US and Europe have essentially copied Japan.
If Japan gives up on low rates and QE, it discredits the whole economic policy regime of the developed world.
While these policies have been obvious failures to anyone with a functioning brain, they’ve been very good to the ultrawealthy, who are really the only subset of the developed world that has truly and materially benefitted from them. Zero-bound interest rates and perpetual stock bubbles are the main reason the ultrawealthy have left everyone else in the dust over the past several decades.