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Japan’s economy last entered an expansionary phase in February 2002. Thirty-three months later, in October 2004, it was losing steam. It would not be surprising if the recovery ended that month, as upswings in Japan’s business cycles since the end of World War II have lasted, on average, about the same period of time.

A government economic report shows that coincident indicators — which measure prevailing economic conditions — dropped below the boom-and-bust line of 50 percent for three consecutive months through October. For example, industrial production, factory shipments and retail sales all suffered declines.

Revised preliminary data on the gross domestic product for July-through-September period also point to a slowdown. Third-quarter GDP declined marginally in nominal terms, which incorporate the effects of price changes. The Cabinet Office says the recovery may be ending — the first time it has mentioned that possibility.

Up-and-down business cycles are to be expected in a market economy. Downward fluctuations, as long as they are moderate, are hardly cause for alarm or pessimism. In a mature economy with a gross domestic product of more than 500 trillion yen, changes in the growth rate tend to be small. Several years ago there was much talk of “deflationary spiral” or “economic depression,” but the economy contracted only slightly.

Still, a sluggish economy is nothing to cheer about. The recovery of the past three years has brought little or no sense of material improvement to Japanese consumers. The general feeling has been that stagnation persists.

The reason for this seems to lie in the “polarization” of the Japanese economy — as seen in the divides between manufacturers and nonmanufacturers, urban centers and provincial regions, and large companies and small ones. In the past, growth in a leading industry, such as manufacturing, had extensive spillover effects on other industries. That kind of across-the-board expansion is now less likely.

During the latest recovery, manufacturers of cars and electronics have expanded sales and profits almost as fast as they did in the high-growth period of the 1960s. They have received a big boost from exports to major markets such as China and the United States. Household digital products have enjoyed robust demand both at home and abroad. Corporate restructuring has also bolstered the profit position.

By contrast, companies in the nonmanufacturing sector, including retailers and service providers, have languished. The main reason is that there is not much room left for market development. Because employment is concentrated in this labor-intensive sector, a majority of workers have seen their wages stagnate. No wonder these people have experienced no real sense of recovery.

Geographically, the economic situation has been relatively good in regions with heavy concentrations of manufacturing activity — notably in prefectures along the Pacific coast of central Japan and in the greater Tokyo area. But stagnation has continued in other regions, especially those that are sparsely populated. Polarization has also occurred in terms of corporate profits, with large companies gaining far more from cost reductions than smaller ones.

Protracted deflation has reinforced the sense of stagnation. Falling prices are in large part a result of corporate efforts to cut costs and streamline distribution systems. In this sense, deflation should have been more a boon than a bane to the economy. In reality, though, people have tended to view price declines as an omen of recession.

Exports have played an important role in the latest economic recovery. The deceleration of growth is due partly to the slowdown in foreign sales, particularly to China and the U.S. The worry is that the ballooning U.S. trade and budget deficits are creating downward pressures on the dollar. Appreciation of the yen is bad news for exporters.

Nevertheless, changes in exchange rates cut both ways. A stronger yen makes Japanese products more expensive abroad, while reducing prices for foreign goods at home. Cheaper imports spur domestic demand, so it is misleading to emphasize only the negative side of a higher yen.

Essentially, economic stagnation in Japan reflects imbalances in the nation’s economic society. One way to correct the imbalances is to develop regional economies through decentralization. Conventional stimulus measures, such as boosting public-works spending, will do more harm than good.

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