Photographer: Tomohiro Ohsumi/Bloomberg

Japan’s Economy Is About to Grow by $175 Billion -- on Paper

Counting R&D will add to bottom line, but not to growth rate
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Japan’s economy will grow by an amount equivalent to New Zealand's economy in the blink of an eye on Thursday.

That's when the government announces the revision of gross domestic product data, using a new accounting standard. Nominal GDP was 500.6 trillion yen for fiscal year 2015, according to the most recent reading released on Nov. 14.

One of the most important changes will include research and development to the sum of all goods and services produced in the nation. This will bring Prime Minister Shinzo Abe closer to his goal of expanding GDP to 600 trillion yen, although it won’t alter the fundamental problem of weak economic growth in Japan.

In the five years to 2015, Japan grew about 6 percent, while the the U.S. economy expanded more than 16 percent.

Using System of National Accounts 2008 methodology, Japan will treat R&D expenditure as capital formation, rather than as intermediate inputs that are used up during the production of other goods and services.

These changes will add 19.8 trillion yen ($175 billion) to nominal GDP for 2011, according to calculations by the Cabinet Office. Data will be revised back through 1994.

Other nations including the U.S., the U.K. and Canada have adopted SNA 2008.

When the U.K. updated its GDP accounting methods in 2014, its statistics office started estimating the size of drug use and prostitution in the economy, among other changes. Japan won’t be including illegal activities in its new measurements.

“I won’t be surprised if the revisions in the third quarter and past data are more substantial than usual this time,” said Masamichi Adachi, an economist at JPMorgan Securities Japan. However, "there will be no change to the picture for a moderate recovery since 2014,” he said.

The economy probably grew an annualized 2.3 percent in the three months through September, according to the median forecast of economists in a Bloomberg survey. The preliminary report last month showed a 2.2 percent expansion.

This won’t be the only change to how Japan’s measures the economy. After repeated controversies about the accuracy of government data, Abe’s Liberal Democratic Party will report early next year on how to improve the statistics used to compile GDP.

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