New Yardstick Will Help Abe Make Japan's Economy Look Bigger

  • Government will start counting R&D spending as investment
  • Shift will reflect update required under international rules

Changes are afoot that will help Japan boost its gross domestic product -- at least on paper -- by accounting for research and development spending on such things as robotics technology and new cancer drugs.

QuickTake GDP

While this won’t come soon enough to affect GDP data next week that may show Japan entered its second recession since Shinzo Abe took office, the changes set for late next year could help the prime minister move toward his goal of expanding the economy by 20 percent to 600 trillion yen ($4.88 trillion) over five years.

“It’s true that R&D expenditures will help push up the size of GDP somewhat, but even with such a drug, it will be difficult to get to the goal,” said Yusuke Shimoda, an economist at the Japan Research Institute in Tokyo. “It will be inevitable for Japan to implement the growth strategy step by step to boost the nation’s growth rate.”

Japan’s move, which comes after the U.S., Australia, the U.K. and Canada updated the way they measure GDP, will have almost no impact on the economy’s growth rate, said Koichi Haji, an executive research fellow at NLI Research Institute in Tokyo. Haji, who is a former member of a government national accounts committee, was also doubtful that Abe would reach his target in five years.

The government plans to make the changes in December 2016 to reflect an update of international guidelines, known as the United Nations System of National Accounts 2008. The biggest change for Japan will come from including R&D costs as investment.

That revision may boost the level of Japan’s nominal GDP by about 3 percent to 3.6 percent for the period from 2001 to 2012, according to an estimate by the Cabinet Office. Japan’s nominal GDP was about 500 trillion yen in the second quarter of 2015.

This will be the most significant change to GDP since 2000, according to NLI Research’s Haji. The government reviews methods for calculating GDP data about every five years and the last time it made a change was in 2011. The U.S. implemented some of the changes outlined in the 2008 SNA in 2013, while Germany and the U.K. acted in 2014.

When the U.K.’s statistics office made its changes, drugs and prostitution went into its calculations. Japan won’t be including illegal activities in its new measurements.

R&D’s Role

GDP is the sum of all final goods and services produced in a country, as tracked by consumer spending, government outlays and business investment for such things as factories, equipment and inventories. It also includes the value of exports minus imports.

Japan will start treating R&D expenditures as capital formation, changing from intermediate inputs that are used up during the production of other goods and services.

While business R&D expenditures aren’t currently included in Japan’s GDP, costs by non-profit institutions and governments go into consumption expenditures.

A range of Japanese businesses including Toyota Motor Corp. and electronics giant Hitachi Ltd. are expanding R&D spending as they seek to develop technology, such as automated driving and artificial intelligence.

Toyota, Hitachi

Toyota forecast that its R&D expenditures would rise 5.5 percent to 1.06 trillion yen in the year ending in March 2016, according to its website. Hitachi estimates its R&D costs at 355 billion yen for this fiscal year, up about 6 percent.

“Japan has been putting a huge amount of money into R&D and this is a strong point for Japanese companies,” said Yuichi Kodama, an economist at Meiji Yasuda Life Insurance Co. in Tokyo. “The inclusion of R&D expenditures to GDP is basically a plus for Japan. Yet it’s uncertain to what extent R&D spending will grow in the years ahead.”

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