Lex: Japan

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Japan is officially in recession again. But even by the low standards of other developed economies, Japanese national income accounts are notoriously unreliable. If preliminary estimates of gross domestic product are confirmed, statistical quirks probably explain much of the measured decline.

Real GDP has grown 2.6 per cent for 2004 as a whole, in spite of downward revisions. A slightly more balanced spread of growth could have easily avoided a recession. Moreover, Japan's statisticians recently started to re-weight the components of the economy each year, rather than twice a decade. This technique, called chain-linking, helps strip out the impact of relative price movements on consumption. In a deflationary environment, this avoids overstating real GDP, as has been the case in Japan.

Conversely, Japan is probably healthier right now than yesterday's downward revisions suggest. Admittedly, the scary headlines will hardly lift consumer confidence and may damp investment. Japan's reliance on exports makes it vulnerable to further setbacks. However, 2005 may also be the year when domestic reforms start to bear fruit. With companies redeploying their capital, overall return on equity is forecast to top 10 per cent - a level not seen since the 1980s. If this is what Japan Inc is capable of with the rest of the country in the doldrums, just imagine its performance if Japan turns the corner.

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