November 21, 2014
The NYT used the reported drop in third quarter GDP as the basis for pronouncing the death of Abenomics in Japan with a piece headlined “with bad economic news for Japan, Abe’s magic seems to evaporate.” A closer examination of the data indicate that Abe’s program may not be dead yet.
While GDP did fall at a 1.6 percent annual rate in the third quarter, following a much steeper drop in the second quarter, the decline was entirely driven by a sharp falloff in the pace on inventory accumulation. According to the OECD, inventories contributed 2.4 percentage points to the decline in growth, implying that final demand grew at a 0.8 percent annual rate in the quarter. (I have crudely annualized quarterly rates by multiplying by four. Due to rounding, these numbers will not be exact.)
Inventory changes are extremely erratic. They added 4.8 percentage points to growth in the second quarter, after subtracting 2.0 percentage points in the first quarter. It is virtually certain that they will be a strong positive factor in the fourth quarter growth figure. (The drop in GDP is attributable to a sharp increase in consumption taxes in April. The resulting contraction in GDP has led Abe to postpone another increase scheduled for next April.)
It is worth noting that Abenomics has been an extraordinary success in promoting employment, with the employment to population ratio rising by two full percentage points since Abe took office in 2012. This would be the equivalent of 5 million jobs in the United States. The 3.0 percentage increase in the employment rate of women had been especially impressive. The employment to population ratio for women in Japan is now higher than in the United States.
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