Japan's Economy: The Idiosyncratic Recovery Continues

Japan's march toward stable, full-employment growth has continued. Despite predominant similarities with the U.S. economy, Japan?s economic situation has several significant differences. First is the persistence of mild deflation for a decade, and inflation expectations continue to be very low. Second, the labor market has been tightening, yet nationwide average wages have not been increasing; indeed, the total cash earnings index again slightly decreased in the first half of 2007. Third, interest rates are extraordinarily low. Fourth, the yen has been weak in terms of economic fundamentals. Moreover, given relatively elastic supply conditions, inadequate aggregate demand continues to be the major constraint on more rapid growth. The Liberal Democratic Party's huge losses in the July Upper House elections increase economic policy uncertainty. I remain fundamentally optimistic about Japan's ability to solve its basic problems, albeit at its own pace and in its own ways.