Start-up to predict economic growth with satellite images of night lights

TOKYO — Nowcast Inc, a Japanese financial research and technology start-up, has developed a product that estimates economic growth in real time by using satellite images of night-time lights.

Based on algorithms that examine changes in the intensity of illumination, as well as a range of published statistics including industrial production and trade, the Tokyo-based company can accurately forecast changes in gross domestic product, chief executive officer Ryota Hayashi said in an interview.

Nowcast, which already provides real-time inflation data, is aiming to start publishing forecasts for economies including Japan, the US, China, India and Taiwan when the product is released as early as February, according to Mr Hayashi. The firm is seeking to sell the service to investors who rely on official GDP figures that are released weeks after the end of each quarter.

“Using three-month-old factors in your models is far from ideal,” said Mr Hayashi, 31. “Investors really have strong needs for this kind of product. It’s important to get the information quickly.”

Testing in Japan has shown the product to be more accurate than economist surveys compiled six weeks before growth statistics are released, according to Mr Hayashi.

SATELLITE DATA

While other start-ups have begun using satellites to examine information ranging from traffic movements to crop yields, Mr Hayashi said Nowcast is the first to market a product that forecasts GDP using night lights. Such information can be a useful proxy for economic activity, particularly where traditional data is poor or unavailable, Brown University economist J. Vernon Henderson and others concluded in a 2012 study.

“This is a really interesting concept,” said Mr Kenta Tadaide, a senior economist at Mizuho Research Institute. “There are probably some areas, particularly in the service sector, that it may not be able to pick up, but even if it can tell us things like factory utilisation more quickly than other data, then it’s going to be useful.”

Japan’s government releases GDP statistics about six weeks after the end of each quarter, and revises the figures a month later. Nowcast’s system will give its subscribers access to regularly updated forecasts even before the quarter has ended.

As of Dec 8, its estimate for the current quarter was for Japan’s economy to grow 0.27 per cent from the previous three months.

HEDGE FUNDS

Mr Hayashi said he plans to sell the service to around 100 customers by the end of next year — mainly institutional investors such as pension and hedge funds that use the data in their asset-allocation models. A beta version estimating Japanese and US economic output is now being used by five customers that subscribe to Nowcast’s existing forecasts of consumer prices, Mr Hayashi said.

To compile the data, Nowcast uses satellite information provided by the US National Oceanic and Atmospheric Administration, having signed an agreement in November giving it exclusive access in Japan.

Internal testing of the system’s accuracy shows an average deviance of 0.36 percentage point two weeks before the release of Japan’s official statistics and 0.39 percentage point six weeks ahead, Mr Hayashi said. That is in line with an average 0.33 percentage-point deviation in surveys conducted by the Japan Centre for Economic Research two weeks before the official release, and beats its deviance of 0.48 percentage point at six weeks.

Nowcast, which formed last year out of the University of Tokyo, began releasing real-time estimates for consumer prices in January, using data including sale transactions at retail stores. Mr Hayashi became CEO when Finatext, a financial app-maker that he founded, bought Nowcast earlier this year. BLOOMBERG