Maybe it's time to stop dismissing the risk of stagflation in Japan.

I've raised this risk a couple of times during the last 12 months as inflation rose without commensurate increases in wages or productivity. But Tuesday's ugly gross domestic product report suggest it's a clear and present threat to Japan's best chance at economic recovery in more than a decade.

The collective reaction Tuesday to the 6.8 percent plunge in second-quarter growth seemed to be: "Relax, it could've been worse." After all, many economists were braced for a 7 percent-plus contraction following an ill-timed and ill-conceived consumption-tax increase in April. Yet the detail of the report — and the balance of other recent data — point toward a period of sluggish growth, at best, and continued inflation gains.