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The government has announced that Japan’s economy continued to grow for the eighth consecutive quarter in the October-December period. Gross domestic product in the quarter registered 1.2 percent growth in real terms from the previous quarter, translating to an annualized 4.8 percent. This growth rate exceeds the average market forecast of an annualized 3.8 percent.

The 1.2 percent growth in the last quarter of 2006 represents a sharp increase from the 0.1 percent gain the previous quarter. In nominal terms — which do not adjust to price changes and thus better correspond to people’s real-life perceptions — the October-December GDP also grew 1.2 percent or an annualized 5 percent.

This is the first time since October-December 2004 that nominal GDP growth has surpassed real GDP growth. For all of 2006, Japan’s GDP grew 2.2 percent in real terms, representing the seventh straight year of expansion. In nominal terms, it grew 1.2 percent, representing the third straight year of expansion.

The figures as a whole show that the Japanese economy is steadily expanding. But the government and the Bank of Japan need to carefully look at the economic indicators — especially personal spending, wage growth and price levels — in deciding policy. The central bank’s policy board is scheduled to meet Tuesday and Wednesday to discuss what to do with the nation’s benchmark short-term interest rate, now at 0.25 percent.

In January, the BOJ decided against raising the key interest rate, defying market expectations, because the prevailing opinion on the BOJ policy board was that personal spending, which accounts for slightly less than 60 percent of GDP, was not strong enough.

The high growth in GDP in the October-December period is attributed to a turnaround in personal consumption. In the July-September period, personal spending had contracted by 1.1 percent from the previous quarter. It rose 1.1 percent in October-December. Spending increased on items such as cars, flat-panel wide-screen TVs, tobacco, and on services including hotel accommodations. Increased spending apparently contributed to pushing up total domestic demand, which buoyed up GDP by 1 percent from the previous quarter. External demand lifted GDP by 0.2 percent.

But the sober fact is that personal spending has merely returned to the level of the April-June period. The Cabinet Office said that when the first and last halves of the year 2006 are compared, personal consumption leveled off. In fact, personal consumption in the July-December period decreased by 0.2 percent from the January-June period.

The government’s family income and expenditure survey shows that, in December 2006, an average household spent 1.9 percent less than a year before, representing the 12th straight month of year-on-year spending contraction.

Economic and fiscal policy minister Hiroko Ota took a cautious attitude concerning the nation’s economic conditions. She said at a news conference, “We can never say personal spending is strong.” She also said slow gains in worker wage levels are one reason for sluggish personal spending. Another government survey shows that while the average monthly wage in 2006 increased by 0.2 percent from the previous year, it decreased 0.3 percent if overtime pay is excluded.

The price situation also must be carefully considered. The GDP deflator, an indicator of comprehensive price movements, in the October-December period dropped 0.5 percent from the same period a year before. That represented the 35th straight quarterly slip, year on year, although the margin of decline has narrowed for four consecutive quarters. The GDP deflator for all of 2006 fell by 0.9 percent from the previous year, representing negative growth for the eighth straight year. The 0.9 percent drop compares with the 1.3 percent drop in 2005.

Although Mr. Ota said she is confident that the departure of deflation is in sight, she refrained from declaring that the Japanese economy has left deflation behind. The price situation will be an important factor when the BOJ policy board discusses its next move concerning the level of the key interest rate.

To maintain the key interest rate at the present low level may not be helpful for the economy in the long run. The weak, yen apparently linked to the low key interest rate, may invite criticism from trade partners. At the same time, many people aren’t feeling the salutary effects of the current economic expansion, as indicated by the amount of money they receive and spend. This, too, must be taken into account. This year’s wage negotiations have yet to be concluded, so future wage levels are not known. The central bank faces a difficult decision. Prudence in making the decision and a full explanation of about the decision are essential.

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