For Japan, When GDP is so Close to the Zero Line, Inventories are the Dominant Swing Factor

So Japan’s economy is back in technical recession…for the fourth time in five years (first chart). It’s likely that this unfortunate reality will be met with additional monetary ease, but that is a discussion for another day. Here we’d just like to make a very simple observation: when your GDP growth runs close to the zero bound, as it has in Japan, the inventory factor can be the make or break variable. When we break down Japan’s GDP growth in to its various components and then measure each of the components’ contribution to the overall number (second chart), this point becomes obvious. Out of the last eight quarters, the inventory contribution to overall GDP growth – as measured by the light blue bar in the chart – has been an outlier in seven of those quarters. In the latest quarter alone overall GDP contracted by .8% on a sequential basis, but consumption, trade and private residential investment all contributed positively – adding a combined 2.2% – while inventories subtracted a whopping 1.9%. It’s not at all rare in economies that inventories bounce around and act as noise to the overall trend in growth, but in Japan’s case with the real economy running so close to flat it appears inventories are having a larger impact than is typical.



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