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International: We of Little Faith

After so many delays and so many missteps, skepticism is the best reception a real honest-to-goodness Japanese recovery can expect.

The Japanese GDP data released last week indicated that the world's number two economy was expanding in the first quarter at a pace even faster than that of the United States, if you can believe the figures.

If you can believe the figures. I wish I were capable of offering a useful insight into their reliability, but I have taken so many head fakes on Japanese economic recovery that I'm contemplating suing for whiplash. So rather than dealing with the numbers themselves, let's consider their reception.

If you can believe the figures. They got the reception that should have been expected. Bunk! Nonsense! Ridiculous! Who are they trying to kid? The

Economic Planning Agency's

estimate of first-quarter GDP was greeted with so enthusiastic a credibility haircut that it resulted in the loss of both ears.

Even a fair-minded analyst might doubt the numbers. More than half of the annualized 7.9% growth rate was the result of government purchases, and even the better performance turned in by household and corporate spending was partially the result of tax cuts and direct government loans to businesses. Furthermore, there was a huge seasonal adjustment factor applied to these estimates. Seasonal adjustment is a tricky proposition even in the hands of bureaucracies in higher current standing than those of Japan, so these numbers deserve to be treated with some skepticism.

That skepticism is probably the most reliable fact of the whole matter: Nobody seems to be willing to take these numbers at face value, or interpret them as in any way an accurate estimator of current conditions or future prospects. So in best contrarian style, perhaps we should be skeptical of that skepticism. When Japanese recovery finally does happen, it is destined to be denied. After so many delays, so many missteps, so many head fakes, skepticism is the best reception a real honest-to-goodness Japanese recovery can expect. I don't know if this is that recovery, but I found the uniformly cynical commentary to be disquieting: If nobody believes it, it just might be true.

What might Japanese recovery mean? I've been thumping that tub in this space for longer than I want to recall, but try this take on it. A senior

Federal Reserve

staffer -- not an official -- was quoted as saying, "To be honest, I don't have any way of judging independently what the Japanese authorities reveal to us, how likely this is to be a substantive turning of the corner and how likely it's due to transitory factors." Skepticism diplomatically rendered. She went on to say that, "if the rest of the world is going gangbusters, we'll be the first ones to cheer them on, but we will adjust U.S. monetary policy." These may not be the words of the Fed's onliest true oracle -- we'll hear from him on Thursday -- but they have a ring of verisimilitude.

It is extraordinary how quickly attitudes can change. The Fed funds futures market now prices in a 25 basis point tightening at the June 29-30

FOMC

meeting as a slam-dunk. As recently as six weeks ago, it was commonly agreed that the Fed really could do nothing soon. The

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of May 1 reported that its survey of economists was split 51% to 49% on the question of the

direction

of the Fed's next move. The narrow majority held that it would be an easing. Some people hold that it is a good thing for economists to be split down the middle, but I disagree.

Over the May to early June interval in which market attitudes have shifted from "the Fed's hands are tied" to a 25 basis point sure thing, it has been difficult to make money from the long side. The long bond has backed up in yield by 50 basis points, and two-year notes are 64 beeps cheaper. Over the past month, none of the widely followed equity benchmark indexes have done better -- not large cap, not small, neither value nor growth, not tech, not drugs, not much. Utilities have squeaked out a small plus and the

Amex

ADR index hints that foreign issues are getting a look, but good ol' mainstream U.S. stocks and bonds show a fittingly fearful respect for the sea change in market reality that a new direction in Fed policy portends.

That new direction is driven by the sort of developments that Japan's GDP report may (or may not; who can trust it?) herald. The Fed staffer, despite her lack of a voice in the FOMC's council chamber, has the analysis just about exactly right. Her view is likely to be backed up when

Greenspan

speaks on Thursday.

And, as I argued last week, if the Fed is going to tighten at all, why would it do so only once?

Jim Griffin is the chief strategist at Aeltus Investment Management in Hartford, Conn. His commentary on the financial markets is based upon information thought to be reliable and is not meant as investment advice. Aeltus manages institutional investment accounts and acts as adviser to the Aetna Mutual Funds. While Griffin cannot provide investment advice or recommendations, he invites you to comment on his column at

GriffinJ@aeltus.com.