A Denso employee inspects assemble parts for a Bus Accelaration Sensor at the company's Daian plant

Bright and early on Monday morning, expect to hear some gloomy news — that Japan is in recession, for the fourth time in just five years. Doom will be mongered; foes will declare it a fresh blow to Prime Minister Shinzo Abe’s “three arrows” of economic stimulus. And I will not believe a word of it.

That is not because the cries of recession will be false — even though the unemployment rate is low and falling, the corporate mood is one of cautious optimism and Japan is manifestly not entering a slump. Output is expected to fall by 0.1 per cent in the third quarter after a 0.3 per cent decline the quarter before — and, on the standard definition, two consecutive quarters of contraction equals a recession.

The trouble is this definition of a recession is anachronistic and misleading. It is an idea that no longer means what we think it does — that is, a significant decline in activity. Even worse, the way we use it causes harm, not just in Japan but also in an increasing number of advanced economies. The R-word needs a rethink.

Japan keeps entering “recessions” because its population is falling and so the economy has little potential to grow. The Bank of Japan puts trend growth at 0.5 per cent or less, compared with the US Federal Reserve’s estimate of 2 per cent for America. It is as if the US is a couple of metres away from the swimming pool but Japan is walking along the edge and needs only a slight nudge to fall in. As other countries age, they will have the same problem.

In fact, Japan barely needs even a nudge. The average revision to its initial estimates of growth is more than 0.5 percentage points, so the statistics will frequently show recession when the country is actually growing normally, and normal growth when it is actually in recession. Add in some sampling error, plus a bit of unseasonal weather, and a recession every year or two is pretty much guaranteed.

There are three reasons why these false “recessions” are a problem. First, they render comparison between different countries meaningless. A recession in Japan is totally different from one in the US, which is different again from a recession in China.

Second, they mask the concept that actually matters: turning points in the business cycle, when the economy switches from expansion to contraction.

Third, there is some reason to think constant declarations of recession may themselves hurt the economy. Recent work by academics Scott Baker, Nick Bloom and Steven Davis shows uncertainty about economic policy can affect production and employment. Who is going to hit the boutiques of Ginza, or pour millions into a new factory, when the television channels blare downturn?

In the US, a National Bureau of Economic Research committee looks at a host of indicators and then declares when the business cycle starts and stops, but its judgments are only available months after the fact. We need a more automatic way for everyone to know a turning point is upon us.

My proposal is two consecutive quarters of growth 2 percentage points below a country’s trend, as defined by its central bank. For the US, the trend is 2 per cent, so that means two consecutive quarters below zero; for Japan, trend is 0.5 per cent, so it means two consecutive quarters when the economy shrinks by more than 1.5 per cent.

On this measure, Japan’s only recent recession was 2008-09, with a near miss after the tsunami in 2011. That lines up with the unemployment rate and what it actually feels like for the public, who keep being told they are in recession, even as construction sites multiply on the Tokyo skyline. It resembles the traditional definition but allows fair comparison between countries.

I am not optimistic about cutting back on the word “recessions”, though — too many people have reason to declare one. It is a potent word politicians can use to attack opponents, brokers to get clients trading and journalists to push pixels.

We need to start thinking of them as soft patches, not as cataclysms. Perhaps there is a way to use the word more frequently elsewhere, and draw its sting. By the standard now applied to Japan — two quarters of growth 0.5 percentage points below trend — the US had a recession in 2012, pushing the Fed to launch its third round of quantitative easing.

There is some reason to redefine recession like this anyway, because there are signs of the business cycle growing smoother in recent years, and downturns rarer. Before the shock of 2008-09, economists talked of a “Great Moderation” replacing the old cycle of boom and bust. Even after the collapse of Lehman Brothers, many studies still find evidence that output is less volatile than it once was.

But if “recession” meant growth just 0.5 per cent below trend, it would leave the question of what to call the nasty episodes when growth is more than 2 percentage points below trend and the economy is spiralling downwards.

A rare but deep and destructive downturn? There is a good word for that: depression, which is normally saved for 1929-33, but seems a perfectly apt description of 2008-09 and its aftermath. Just remember: if Japan’s economy shrinks for a second quarter on Monday, and everyone declares a recession, the two are very different things.


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