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May 24, 2000

Japan Assailed for Omitting Data in Growth Calculations
(excerpted) By Stephanie Strom, The New York Times

It's All Smoke and Mirrors...Weiss comments

TOKYO, May 23 -- Japan's official economic statistics have always been mistrusted. They became even more suspect recently when the government omitted an important piece of information on quarterly growth, apparently for the first time.

That information, as it turned out, reflected startling weakness, suggesting that Japan's financial institutions were spending little or nothing on upgrading their businesses. Inclusion of the information would have pushed the gross domestic product for October-December 1999 quarter significantly lower than what had been announced.

The conscious omission of the data has been acknowledged by the Economic Planning Agency, though it has not been reported by the Japanese press.

Still, its omission has invigorated critics, in and out of government, who have long contended that the ruling Liberal Democratic Party manipulates economic data for political reasons, papering over harsh realities to create the impression that the economy is recovering from its prolonged malaise.

The Economic Planning Agency had first reported on March 13 that the gross domestic product, the broadest measure of the economy's performance, had declined 1.4 percent in the October-December quarter compared with the period a year earlier. In its first revision of the data on May 11, the agency said the decline was 1.43 percent.

In computing the initial figure for October-December 1999, the agency estimated that capital investment by banks, securities firms and insurance companies declined 3 percent, said Masaaki Maruyama, head of the agency's national expenditures division.

But the agency's subsequent survey showed that capital investment by financial institutions fell by an extraordinary 37.7 percent. "The discrepancy between our estimate and the survey this time was huge," Mr. Maruyama acknowledged.

So he made a decision, which he said his superiors approved, to omit the survey figure from the revision and keep the earlier estimate.

Mr. Maruyama said the agency had never before substituted its estimates for the survey data. "We hesitated to apply the survey figure because the discrepancy was so big and we had no explanation for it," he said.

He said another large discrepancy in the same measure appeared in the April-June 1997 quarter, when the agency's follow-up survey of financial institutions' capital spending showed a 29.4 percent drop from its original estimate. At that time, agency officials decided that the discrepancy reflected the effect of an increase in Japan's consumption tax, and they used the survey data in making the revision.

This time, there was no such obvious explanation. "We could not figure out if it was a problem with the survey data, or whether the survey reflected reality," Mr. Maruyama said.

Under standard procedures, the Economic Planning Agency has two more opportunities to change its figures, in December and again next year. If the survey data are indeed flawed, the agency could conceivably adjust for that then.

There is evidence, however, that the figures are not necessarily flawed. The Japanese central bank's quarterly survey of capital investment by 191 financial institutions showed that spending by these institutions fell 18.1 percent in 1999, and bank analysts are complaining that the companies they follow are not investing nearly enough in information technology to keep pace with global competitors.

"One is left wondering what happened to all those grand plans for picking up technology investment," James P. Fiorillo, senior analyst at ING Barings, wrote in a recent report.

The Economic Planning Agency's omission of this key data from their GDP estimates is just another example of the 'smoke and mirrors' game that the Japanese government plays with its statistics.

In this case, the original estimate gave the Nikkei benchmark index an artificial boost. We told you then not to believe it. Now, the Nikkei has slumped to its lowest level in a year.

We've all heard of missed estimates before... but 3% vs. 37.7%?! And, in all likelihood, the latter figure is, in fact, the correct one as evidenced by this report's figures - spending by financial institutions has fallen 18.1%, technology investments are plummeting, and the recession in Japan continues.

It's not hard to understand why the Japanese government doesn't want to believe that investment in business and capital equipment has plummeted to new depths. But that's the reality.

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