Key business cycle indicators confirm that Japan continues to suffer from long-term economic stagnation, but with an important caveat. Year over year, the Japanese economy expanded by 2.7% at October 2019 and grew by 21.5% over the 7-year period since 2012.
Based on history, downturns typically happen within roughly 8 to 16 months from a country’s peak in Gross Domestic Product (GDP) performance on a Purchasing Power Parity (PPP) basis.
GDP tracks a long-term growth trend via business cycles of growth or recession that repeat approximately every 5 years or so, albeit that no two business cycles mirror the same duration or size. America’s National Bureau of Economic Research found that there were 33 business cycles from 1854 to 2009.
The average length of an expansion is 38.7 months compared to 17.5 months during a recession. Historically, the longest economic contraction in the United States was the 1929 Great Depression that lasted 43 months. That’s more than double the 18-month duration for the Great Recession which began in 2007 and was caused by the real estate bubble created during the 1991 to 2001 boom states Cameron King in his analysis for Forbes.
Cyclical indicators are erratic with multiple major influences. Worse, there is no consensus for which indicators universally signal business cycles in all cases.
Nevertheless, The Economist organizes its benchmarks into 3 critical categories: leading indicators that turn in advance of a cycle change; coincident indicators that define when the overall business cycle turns; and lagging indicators that top out following a business cycle.
Japan’s Leading Business Cycle Indicators
For Japan, 5 of the selected 6 leading indicators below deteriorated over the 12 months preceding the latest reporting period.
The Economist estimates that an economy hits its highest level about 18 months after interest rates begin to rise compared to 8 to 16 months for waning business and consumer confidence. There are shorter timeframes in advance of an economy’s GDP peak for slowdowns in car sales (6 months), retail sales and building permits (2 to 3 months).
- Interest rate: -0.1% at Dec. 2019 (no change from 12 months earlier)
- Business confidence: 100.3733 points at Sep. 2019 (down -1% from 101.3709)
- Building permits: 77,123 at Oct. 2019 (down -7.5%)
- Consumer confidence: 98.13703 at Oct. 2019 (down -2% from 101.102)
- Retail sales: Down -7.1% at Oct. 2019 (down -10.7% from up 3.6%)
- New car sales: 385,859 vehicles at Nov. 2019 (down -12.7% from 385,859)
Japan’s prime lending rate is negative. Negative interest rates often result from a central bank’s desperate attempt to stimulate economic growth via a country’s financial system, according to Investopedia.
Business confidence is an indicator based on opinion surveys revealing how pessimistically or optimistically business managers perceive their companies’ future potential and therefore can anticipate turning points in economic activity. In contrast, consumer confidence measures public opinions on standardized questions about household finances, a country’s economy in general as well as plans for major purchases on durable products lasting over a year or buying a home or an automobile.
Building permits mean official authorizations required before new building construction can proceed. The US Conference Board has studied building permits as a leading macroeconomic indicator for country and global business cycles. Typically, construction work starts immediately after a building permit is granted.
Retail sales refers to an aggregate measure of the percentage change in the retail sales index against the same month in the prior year. It measures consumer demand for finished goods and is considered a major macroeconomic indicator of whether an economy is moving towards contraction or expansion. Retail sales focus on volume changes only and exclude price level movements.
Plummeting by the greatest double-digit percentage, Japan’s car sales metric (down -12.7% over the past 12 months) is driven by the falling number of new passenger cars sold irrespective of price.
Japan’s Coincident Business Cycle Indicators
Percent changes in Gross Domestic Product (GDP) on a Purchasing Power Parity (PPP) basis are much-scrutinized headline numbers that define whether an economy is contracting or expanding. That’s because year-over-year GDP changes coincide with and thus signal the start of a recession or boom period.
The latest GDP on a PPP basis statistics reveal that the Japanese economy is stagnant given the meager annual growth.
- GDP: US$5.747 trillion at Oct. 2019 (up 2.7% from $5.597 trillion)
- GDP per capita: $45,546 at Oct. 2019 (up 2.9% from $44,246)
Please note that Japan’s share of the world’s overall GDP of $141.860 trillion was 4.1% at October 2019, same as one year earlier.
In addition, Japan’s GDP per capita income of $45,546 is almost 2.5 times greater than the global average GDP per person of $18,391 as of October 2019.
Japan’s Lagging Business Cycle Indicators
Capital investment represents the only selected lagging indicator that improved compared to the same metric in the prior year, albeit by a very modest percentage. Both Japan’s unemployment and inflation rates worsened slightly over the latest year-over-year period.
Usually capital investment shadows GDP peaks and valleys via a 12-month delay. Both inflation and unemployment accelerate about 6 months after GDP reaches its maximum growth.
- Capital investment to GDP ratio: 24.592% in 2019 (up 0.167% from 24.425%)
- Unemployment rate: 2.433% in 2019 (down -0.009% from 2.442%)
- Inflation rate: 0.985% in 2019 (up 0.006% from 0.979%)
The ratio of capital investment to GDP is a lagging but future planning-oriented indicator that records the value that a country spends on capital development and infrastructure projects divided by its overall GDP output on a PPP basis.
Unemployment rate is a crucial percentage based on a country’s total labor force (not its full population) since it profoundly impacts how many debtors can afford to pay their mortgages and other borrowings.
Inflation rate documents the percentage change in average consumer prices in a country over a one-year period.
Research Reference Materials:
Forbes, Recession Is Overdue By 4.5 Years, Here’s How To Prepare. Accessed on December 19, 2019
Investopedia, Negative Interest Rate Definition. Accessed on December 19, 2019
MarkLines Automotive Industry Portal, USA Flash report, sales volume, 2019. Accessed on December 19, 2019
National Bureau of Economic Research, US Business Cycle Expansions and Contractions. Accessed on December 19, 2019
The Conference Board, Global Consumer Confidence Unchanged in Q3. Accessed on December 19, 2019
The Economist, Guide to Economic Indicators: Making Sense of Economics (7th Edition). Accessed on December 19, 2019
Trading Economics, Interest rates by country. Accessed on December 19, 2019
Wikipedia, Consumer confidence index. Accessed on December 19, 2019