It is now fashionable for the Japanese government and media pundits under government patronage to pronounce an ``economic recovery.'' According to the government's latest estimate of the gross domestic product, the Japanese economy expanded by 6.1 percent at an annual rate in the first quarter of 2004, compared with a 4.4-percent growth rate for the U.S. economy in the same period.

Despite the euphoria over the ``brisk economic growth,'' the levels of stock indexes in Tokyo have stayed well below those in the previous ``economic recovery phases'' since the burst of the asset-price bubble in the early 1990s. Although it has rebounded since last year, the Nikkei 225 stock index has lately been in the range of 11,000 to 12,000. The index had topped well over 20,000 in the recovery phases of the 1990s, and had never fallen below 14,000-even in the downward phases of the same decade.

Price-earnings ratio

Some may argue that the Nikkei 225 ``understates'' the Tokyo stock market because the index's composition has changed since the 1990s. But if you look at the TOPIX, which represents all stocks listed in the First Section of the Tokyo Stock Exchange, you see that the TOPIX and the Nikkei have had the same pattern of fluctuation since the early 1990s.

How do you reconcile the ``low'' levels of the stock indexes with the Japanese government's self-congratulatory claim of economic recovery due to ``reforms''? Is the Japanese economy as a whole really growing as briskly as media pundits under government patronage like to portray?

First of all, technical measures, such as the price-earnings ratio (PER), which are purported to evaluate the ``appropriateness'' of stock prices, have fallen to internationally comparable low levels from the exotically high levels in the 1990s. The expected PER for the TOPIX has lately been around 18, compared with about 23 for the S&P 500 index in the United States. If technical measures, such as the PER, are appropriate, Japanese stock prices are neither undervalued nor overvalued, and only a further increase in corporate earnings will justify the continued rise in Japanese stock prices.

Some economists, mostly non-Japanese, have already criticized the government's growth figures as grossly overstating the strength of the economy. The rate of economic growth is more precisely the growth rate of ``real'' GDP. And real GDP is a figured ``cooked'' from nominal GDP (or GDP at current prices) and deflators of GDP components (or price indexes of GDP components).

When prices, or the GDP deflators, are falling, the same level of nominal GDP is translated into a higher real GDP. So those who question the level of Japan's real GDP doubt the appropriateness of the deflators of GDP components, which still set the year of 1995 as the base year. The nine years since 1995 is really a long time, especially when rapid technological changes distort the relative prices of products.

Indeed, according to the government's own estimate, Japan's nominal GDP peaked at 523.6 trillion yen at an annual rate in the fourth quarter of 1997, and it has been on a continuous downward trend since 1997. Meanwhile, real GDP at 1995 constant prices has been on an upward trend, reflecting a sharp fall in the deflators of GDP components.

Without running into the arguments over the deflators of GDP components, however, we are able to see in the fluctuation of nominal GDP a quite different picture of the economy than the one the media pundits are espousing.

What directly corresponds to the books of companies is nominal GDP, or GDP at current prices. Corporate sales and earnings are all in current prices.

According to the government's own estimate, real GDP increased 7.6 percent, or 39.7 trillion yen from 525.5 trillion yen to 565.2 trillion yen, at an annual rate in 1995 constant prices for the past eight quarters through the first quarter of 2004. These are respectable figures indeed. On the other hand, nominal GDP is considered to have fluctuated only in the range between 498 trillion yen and 502 trillion yen at current prices for the same period.

Sales of Japan Inc.

The government's actual estimate for the first quarter of 2004 is 506.9 trillion yen. But the insufficient discounting of the leap year factor, or an extra day, in the first quarter of 2004 appears to have grossly overstated the figure. For example, discounting no leap year factor makes a difference of 4.5 percent, or 22.6 trillion yen at an annual rate, for the GDP of 500 trillion yen.

So you could safely say that nominal GDP has remained almost flat, marginally around 500 trillion yen. Even at 506.9 trillion yen in the first quarter of 2004, it is still well below 516.5 trillion yen in the first quarter of 2001, or just one quarter before Junichiro Koizumi formed his first Cabinet in April 2001.

In plain language, the flat nominal GDP means the ``sales of Japan Inc.'' as a whole have remained flat for the past two years.

So where has the increase in profits of Japan Inc. come from? The obvious answer is the cut in costs, especially labor costs.

According to the government's own estimate, compensation of employees (wage, salary and bonus) has declined by 17.2 trillion yen, or 6.2 percent, from 275.5 trillion yen in the first quarter of 2001 to 258.3 trillion yen in the first quarter of 2004 at an annual rate. The size of the decline explains the bulk of the increase in profits of Japan Inc. during the period.

Compensation of employees peaked at 282.1 trillion yen in the third quarter of 1997, and its decline has accelerated under Koizumi's rule. Notable in the first quarter of 2004 is the cut in compensation of employees by 3.7 trillion yen, or 5.5 percent at an annual rate, from the previous quarter, indicating that the squeeze on Japanese workers has not stopped, yet.

With wage, salary and bonus in a shambles, it is no wonder that Toshifumi Suzuki, chairman of both Ito Yokado and Seven-Eleven Japan, had to lament over the poor personal consumption shown in The Asahi Shimbun's survey released last Sunday. Household consumption after imputed rent has remained flat at about 226 trillion yen for the past two years.

In sum, the government's own estimate of GDP at current prices reveals that the Japanese economy ``as a whole'' is still flat. The rosy picture of the Japanese economy expounded by the media pundits is largely due to their ``selective'' and ``partial'' use of the government's statistics to their advantage.

It must be noted that the export sector, the only bright spot of the Japanese economy for the past two years, is already in peril as China and the United States hint at further brakes on their economies.

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The author is director of the Trilateral Institute Inc. (Sankyoku Keizai Kenkyusho), a private think tank based in Tokyo. His column runs on the third Wednesday of each month. He contributed this comment to the Herald Tribune/ Asahi.(IHT/Asahi: June 16,2004) (06/16)