via notayesmanseconomics:
This morning the economic news has been made in the east in Nihon.
Japan’s economy shrank for the first time in four quarters in the January-to-March period. Private consumption was virtually unchanged for the first three months of the year.
The Cabinet Office released preliminary gross domestic product figures for the first three months of this year on Friday.
They show the economy contracted by an annualized 0.7 percent in real terms compared with the previous quarter.
The last time GDP shrank was in the January-March period of 2024 as production suspensions following rigged certification tests among automakers took a toll. ( NHK)
As we would record it the economy shrank by 0.2% in the first quarter of 2025. As to the driving force here NHK tucks it away at the end.
Exports fell 0.6 percent, while imports climbed 2.9 percent.
Actually they have not compared like with like because if we are dealing in annualised terms then exports fell by 2.3% and imports rose by 12.1%. We can however compare this to the overall move and if we switch to our system higher imports subtracted 0.7% from GDP and lower exports subtracted 0.1%. Thus we see that domestic demand must have risen by 0.6% and we see that the main player here is something that has become rather familiar in GDP reports this time around.
An Investment Surge True or False?
Last night in the comments section Kevin posted a link to the work of Sasha Yanshin with him pointing out that the surge in Investment in the UK GDP numbers was as a result of a seasonal adjustment because the basic numbers fell. If I may be permitted an aside for the new readers that arrived for my Bank of England post on Wednesday the comments section is of a high standard. Also we may well be seeing a real world example of my theme that seasonal adjustment has struggled with the economic changes post Covid.
But the central point is that UK GDP recorded a surge in Investment and now let me take you back to the 2nd of this month.
You could on a cursory reading also claim a great new future for America based on an investment surge.
The largest contributor to the increase in investment was private inventory investment, led by an increase in wholesale trade (notably, drugs and sundries).
The US GDP numbers also showed a surge in Investment and guess what?
The estimates of private inventory investment were based primarily on Census Bureau inventory book value data and a BEA adjustment in March to account for a notable increase in imports.
Ah an adjustment! We are starting to have a consistent theme here and I was on the case.
So another adjustment! Are we allowed to know the numbers under normal methodology?
Now looking at the numbers for Japan I see the following. Japanese private investment raised GDP by 1.4% this quarter and apparently nearly all of it ( a 1.2% effect on GDP) was on housing. Ironically if we look at government policy something – a house building boom- we might have expected in the UK where it was absent in the GDP numbers. But yet again we see a recorded Investment boom which is trimmed back to 1% quarterly by a decline in public investment.
So we look to have a situation similar in principle to the one I pointed out back on the 12 th of August 2021.
The implied deflator strengthened in the second quarter, increasing by 6.2%. This primarily reflects movements in the implied price change of government consumption, which increased by 32.7% in Quarter 2 2020. This notable increase occurred because the volume of government activity fell while at the same time government expenditure increased in nominal terms.
Back then the UK Office for National Statistics faced an awful problem as a technical change to using output measures for health and education blew up. So they distorted the Deflator which is the inflation measure to square the circle. Perhaps they hoped no-one would spot inflation surging at a time we were told there wasn’t any.
“The Party told you to reject the evidence of your eyes and ears. It was their final, most essential command. His heart sank as he thought of the enormous power arrayed against him, the ease with which any Party intellectual would overthrow him in debate, the subtle arguments which he would not be able to understand, much less answer. And yet he was in the right!” ( Orwell 1984)
The consequence was that I lost faith in the Deflator as an inflation measure which is a shame as it is the most comprehensive measure. Now we see that this quarter is posing a challenge for measurement of Investment. We are seeing more and more “adjustments” rather than the actual numbers.
Investment
In itself it is a simple concept as in money spent now for future returns as opposed to consumption which is money spent for a gain here and now. But I have long worried about it being distorted and there has been an example of that in my home country only this week.
Once complete, NSRG will be one of the largest floating offshore wind farms in the World (three 333km2 sites). This ambitious project will deliver over £4 billion in Gross Value Added (GVA) for the UK and thousands of much needed green jobs.
This will no doubt be counted as an investment when in fact it will raise energy bills ( it has been promised 4 times the current price) and that is assuming it does not sink. So in my opinion it should subtract from investment.
The Financial World
I see that my long-running theme that financial manipulations in Japan has distorted so much is occurring to others.
THIS IS INSANE
Bank of Japan owns ~80% of the country’s ETFs and 7% of the entire Japanese stock market, according to Morningstar and the Tokyo Stock Exchange data. The BoJ also holds ~55% of the Japanese government bonds. Huge distortions. ( Global Markets Investor)
It seems they have made a sighting of The Tokyo Whale! This leads me into one development which hits Japan in two ways.
Japan’s 30-year government bond yield rose to 2.96%, its highest level in almost 25 years.
At the same time, 40-year bond yield reached 3.44%, the highest since its debut in 2007. ( The Kobeissi Letter)
Firstly it is hard to get over the scale of losses made by the Bank of Japan from all its Japanese Government Bond purchases. Next the Japanese government is facing much higher debt costs as the financial repression imposed by the Bank of Japan has stopped at least for now.
Comment
This GDP release poses quite a few questions many of them ominous for Japan. But let me give you a positive because GDP is 1.7% higher than a year ago which is better than us. The going is about to get much tougher though for that variable as they saw a 0.9% surge in the second quarter last year. Plus let me throw in another figure which the Japanese establishment will love. Nominal GDP rose by 5% meaning they are inflating the debt away. Was that always the real arrow of Abenomics?
The overall theme here is that the promised rise to an interest-rate of 1% looks ever further away.