Japan¡¯s real gross domestic product grew 0.9 percent in the October-December period from the previous quarter for annualized growth of 3.7 percent growth ¡ª more than double the market forecast of 1.5 percent annualized growth. The nation¡¯s economy is expected to achieve the government projection of 1.3 percent real growth for fiscal 2007 even if it shrinks 1.6 percent in the January-March 2008 period.

The robust GDP growth is attributable to strong exports and corporate capital spending. But optimism is not warranted. In fact, Economic and Fiscal Policy Minister Hiroko Ota said that while the economy appears to be following a recovery path, there are ¡°downward risks¡± because of trends in the U.S. economy.

In the October-December period, corporate capital spending and exports both expanded by 2.9 percent, but consumer spending increased only 0.2 percent. Although capital investment was strong in export-related industries, unstable financial and stock markets in the United States under the pressure from the subprime housing loan crisis are affecting the real economy. Thus the U.S. economy is likely to slow down, dampening Japan¡¯s export-oriented industries.

Preliminary estimates show that the U.S.¡¯ real GDP increased at an annualized rate of only 0.6 percent in the October-December period. The U.S economic slowdown will also dampen the economies of Asia, the Middle East and Russia, which in turn could dampen Japanese exports to those areas.

Consumer spending, which accounts for 55 percent of Japan¡¯s GDP, is not likely to shoot up since wages are not growing enough. People are also feeling the effects of high oil prices as reflected in rising prices for kerosene and gasoline. Prices of food items such as bread and noodles are rising. Tax deductions for income and residential taxes introduced in 1999 were abolished in 2007. Thus Japan lacks those factors that would induce looser purse strings.

To bolster economic recovery, the corporate sector should increase workers¡¯ wages and the government should implement policy measures that encourage personal consumption.