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Research and Development boosts growth in Japan

, December 8, 2016, 0 Comments

On December 8, Japanese government revised its GDP statistics to conform to the latest standard of national accounts, SNA2008. Before the revision, Japan was one of the last countries, among OECD members not to be following the SNA2008 standard. Australia made the upgrade as early as in 2009. United States followed in 2013 and all EU member countries did the same in 2014.

Japanese policy makers are probably regretting that they have not made the upgrade sooner though. The performance of the Japanese economy looks much better in the newer version of the GDP statistics, especially in the last few years. In the previous version called SNA93, the Japanese economy was estimated to have grown by 0% in 2014 and by 0.6% in 2015. In the newer version, the economy is estimated to have grown by 0.3% in 2014 and by 1.2% in 2015. For a low growth country such as Japan, a difference of 0.3-0.6% is quite significant.

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Where does the new growth come from? 

The most significant change in the SNA2008 is the recognition of commercial R&D as capital expenditure. Prior to SNA2008, commercial R&D was not considered as a final demand item and thus not counted as a part of GDP. For example, when Toyota spends its resources to develop a new design for its vehicle line-up, these spending was not considered as capital investment, but rather as intermediate inputs in the previous national accounts. However, in SNA2008, R&D is now recognized as capital investment, producing an asset with a lasting value. Thus, the level of private capital expenditure has been revised upward significantly in the new GDP statistics.japan-difference-gdp-marketexpress-in

Overall, the inclusion of R&D as capital accounts for 2/3 of the increase in the nominal GDP between SNA93 and SNA08. Other sources of difference include Patent Royalities Treatment, Defence Equipment Capitalization and capitalization of Ownership Transfer Cost.japan-difference-capital-expenditure-marketexpress-in

Now, we would caution to not mistake the rise in the GDP as an actual rise in the economic activity. In a way, it is merely a change in the way economists define GDP. However, we still find it significant that the growth of the overall economy was revised up. It is evidence that the newly recognized part of the economy, R&D activity, was growing more rapidly than the rest of the economy. The analysis published by the Cabinet Office implies that the inclusion of the R&D would continue to boost the growth rate of the Japanese economy by 0.2%. For a country whose trend growth was considered to be close to zero, that is significant.

Lastly, we also note that the boost to the size of the economy from adoption of SNA2008 was much bigger for Japan than for US. When US adopted SNA2008 for its GDP statistics in 2013, the size of the US economy was revised up by 3.6%. For Japan, the upward revision was much bigger, 6.4%. Perhaps it implies that the in-house R&D activities tend to be larger in Japan than in US