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In Economic Assessments, Little Words Loom Large

In its latest monthly economic report released Friday, the Japanese government has upgraded its view on the economy, saying it’s “recovering at a moderate pace,” an upgrade from the December wording that the economy is “on the way to recovery at a moderate pace.”

So what’s the difference?

While the change may seem minor, economists say tweaking is important. They say the new wording represents official confirmation by the government that it is more confident about the prospects for economic growth under Prime Minister Shinzo Abe’s pro-growth “Abenomics” policies.

“The previous statement sounds like the government sees the ongoing economic recovery is fragile, but with the new one, I sense they are more confident to believe that growth will not be interrupted, even if some small risks materialize,” said Takuji Aida, chief Japan economist at Societe Generale.

The government has been issuing its monthly outlook report every month since 1958. Officials say their report is similar to the U.S. Fed Beige Book or statements from the Federal Open Market Committee, in which authorities try to describe the direction and strength of economic momentum as accurate as possible by fine-tuning phrasings they use.

“Our saying ‘recovering’ instead of ‘about to recover’ is like the Fed speaking ‘moderate’ instead of ‘modest,’” a government official said.

The difference can also have practical implications beyond how upbeat the government wants to sound. The report is not just a scorecard, government officials say, it is often used as a benchmark for future economic policies. For example, if a report mentions consumer spending as one of their concerns, it’s likely that a new spending package would be aimed at measures to prop up consumer confidence.

One notable moment came in November 2009, when Japan officially confirmed that the economy was in deflation. Keisuke Tsumura, a Democratic Party of Japan lawmaker who was the third-highest official at  the Cabinet Office between 2009 and 2010, said the idea of declaring deflation was proposed by government bureaucrats, but that the idea was questioned by then Economy Minister Naoto Kan, who later went on to be prime minister.

“It was just a day before the announcement when Mr. Kan expressed his hesitation to go ahead,” said Mr. Tsumura. “He was worried about the impact of the declaration because it meant a fundamental shift on the DPJ’s philosophy on economic policies.”

In the end, “deflation” stayed.

Some outside economists have worried that the assessment could be manipulated for political purposes, such as offering an overly optimistic outlook ahead of an election. But Mr. Tsumura said the assessment is based squarely on economic data, “there is no room” for bias to sneak in, he said.

With the figures prone to media leaks, the government once used a bit of low-tech “data tracking” to find out what was happening. This was done by making small innocuous changes in the copies handed out to various ministries so it could tell who may have leaked the data.

Markets will naturally looking for what’s next to see if the government continues to get more optimistic. While there is no set wording, economists say that it may be looking for such phrases as “recovering” instead of “recovering at a moderate pace.”

For the future, economists will be looking for when the government confirms that the economy is out of deflation. In December, the government said the economy is “no longer in deflationary conditions,” but that is seen as weaker than declaring that Japan has won its long battle with deflationary pressures. Stay tuned.

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