China in Transition

Was Japan's Second Quarter GDP Boosted by SARS?

Chi Hung KWAN
Consulting Fellow, RIETI

According to Japan's recently released gross domestic product figures, real economic growth in the second quarter came to an annualized rate of 2.3%. The quarter in question coincided with the period during which the SARS epidemic had gripped much of Asia, particularly China, and because many had been concerned that this would have an adverse effect on the Japanese economy, the latest figure was somewhat surprising. On this point, some media reports, for example one by the Nihon Keizai Shimbun of Aug. 13, explain the GDP figure as a reflection of the biases of statistical quirks. In other words, the spread of SARS resulted in a decline in the number of Japanese traveling abroad leading, in terms of GDP calculations, to a decrease in imports of services, which is said to be a factor that boosts net external demand (calculated by subtracting imports from exports). However, this perception is based on a misunderstanding of GDP statistics, which does more harm than good when judging the current state of the economy.

GDP literally measures total production within a country, and from the demand side, it is calculated as follows:

GDP = private consumption + private investment + government expenditure + (exports - imports)

Of these components, private consumption, private investment, government expenditure, and exports of goods and services include overseas production (in other words, imports of goods and services). This must be subtracted from total expenditure when calculating GDP. When we consider the influence of SARS as only decreasing services imports, it indeed can be seen to be a factor that boosts GDP. However, this is only one side of the story, and its impact on other items of expenditure must also be taken into account.

First, we must not forget that unless expenditure shifts from overseas travel to other items, consumption on the whole will decrease. For example, if spending on overseas trips falls by ¥100,000, overall consumption will also decline by ¥100,000, and so their respective impacts on the GDP offset each other. As this shows, it is not domestic production that is directly affected by overseas travel, but rather overseas production, which is conceptually neutral as regards GDP. Of course, since such overseas trips are often arranged through domestic travel agencies and make use of domestic carriers, it does lead to a partial decrease in demand for domestic production. In response to this, the decline in overall consumption is larger than that in services imports, and on the whole, GDP is pushed downward.

Certainly, some of the people who decided not to travel overseas might have instead opted to travel within Japan. However, when we look at travel trends during the Golden Week period, which was probably hardest-hit by the SARS epidemic, the amount spent on domestic travel actually fell compared to the same period in the previous year, showing that overseas travel was not completely substituted for by domestic trips. Furthermore, reflecting the fact that travelers to Japan - not only from Asia but also from the United States and Europe - fell substantially during that period, there is no doubt that the domestic travel industry was adversely affected. In fact, as a result of SARS, occupancy rates at Japanese hotels fell across the board, and airlines were being forced to operate in the red.

Thus, it is highly unlikely that SARS helped boost Japan's GDP, and the latest GDP statistics have probably grasped the effects of SARS relatively accurately. If the Japanese economy saw an annualized 2.3% expansion in GDP during the second quarter, despite the adverse effects of SARS, then perhaps we can expect higher growth now that SARS has subsided. In fact, real economic growth has already recorded an increase for six quarters in a row, and with stock prices on a rising trend since May, it may be said that the long-suffering Japanese economy is finally beginning to see a glimmer of light at the end of the tunnel. However, as can be seen by public opinion which says the actual economy has not improved to the extent that the GDP and other statistics indicate, it may take a little more time before the ongoing economic recovery leads to a recovery of public confidence.

August 18, 2003
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August 18, 2003