Japan's Growth Exceeds Expectations, but Deflation Still a Problem

The Japanese economy grew 0.6% in the second quarter, the sixth quarter of growth and well above the consensus estimate of 0.2%. First quarter growth was revised upward from 0.1% to 0.3%. All major sectors except for government consumption, showed increases. Private consumption increased by 0.3%. Gross capital formation increased by 1% in the second quarter, marking its fifth consecutive rise. With exports up 1% and import down by 1%, the foreign trade sector made a significant contribution to growth.. Deflation, however, continues as can be seen in the attached chart that compares nominal and real GDP. Progress has been slow on Prime Minister Koizumi's attempt to dispose of the 44.5 trillion yen ($370 billion) of bad loans at Japan's banks and until this problem is resolved there is no assurance of a substantial and sustained recovery in Japan.