Japanese economy continues to recover

The recovery in the Japanese economy that began last year appears to have continued at the beginning of 2010.

Last week, however, Japan's Cabinet Office announced downward revisions to economic growth estimates. It now says that the economy grew 0.9 percent in the fourth quarter of 2009, less than the initial estimate of 1.1 percent growth. In addition, the revised data show that the recovery that had begun in the second quarter actually stalled in the third quarter when the economy contracted 0.1 percent. For the whole of 2009, the economy contracted 5.2 percent.

The fourth quarter expansion, however, probably continued into the beginning of 2010. Last week, the Ministry of Economy, Trade and Industry reported that industrial production rose 2.7 percent in January, its eleventh consecutive month of increase.

Leading indicators released last week were also mostly positive. The Cabinet Office reported that its composite leading index rose to 97.1 in January from 94.7 in December, its eleventh consecutive month of increase. The Cabinet Office's Economy Watchers Survey also showed improvement, the diffusion index for future conditions rising to 44.8 in February from 41.9 in January.

And today, the Cabinet Office reported that its consumer confidence index rose to 39.8 in February from 39.0 in January.

The recent improvements notwithstanding, some of the initial momentum in the economic recovery may have dissipated though. The accompanying chart shows that the diffusion index from the Economy Watchers Survey and the consumer confidence index did dip towards the end of last year and the February numbers for both remained below the peaks of last year.

The government for one certainly remains cautious about the outlook for the economy. In its latest monthly economic report released today, it said that although the economy "has been picking up steadily", it "remains in a difficult situation".

While today's report noted that an "incipient recovery" in employment can be seen, it said that the economy is "only weakly self-sustaining" and is at risk from a possible slowdown in overseas economies and from deflation.

Nevertheless, the report concluded that for the short term, the economy is expected to expand.