Professor Hugh Patrick, Director of the Center on Japanese Economy and Business, wrote his annual report essay entitled, “Japan’s Economy: The Idiosyncratic Recovery Continues.” Abstract This paper considers a range of issues affecting Japan’s contemporary economic well-being. Japan has continued toward sustained, full-employment growth, though its path has been idiosyncratic and its pace has been erratic. GDP growth in 2006 was a respectable 2.2 percent, driven by business fixed investment and exports. Private consumption has failed to support demand, which reflects very low wage increases. The combination of economic expansion with mild deflation is the big idiosyncrasy of Japan’s economic performance. The decoupling of growth and deflation is explained primarily by the ongoing structural transformation of the labor market. Slow growth in wage income and consumption imply that inflationary pressures will not emerge in the near future, despite economic growth. The likelihood that wage stagnation will persist and consumption’s share of GDP will also continue to decline presents inadequate aggregate demand as a major constraint on growth and Japan’s most important macroeconomic policy issue. Corporate performance continues to improve, but faces new restructuring challenges that involve divestitures, mergers, and acquisitions. Activist shareholders are playing an increasingly important yet controversial role in evolving Japanese companies. Export growth, propelled by a weak yen, has continued to be a major source of aggregate demand and corporate profits. Recent appreciation of the yen, as a result of the global credit crunch and financial turbulence, is a major concern only if it persists. Japan’s trade has shifted away from the United States to Asia. East Asian economic cooperation is increasingly promoted, though the main impetus is political, not economic. Obstacles are currently too great for significant bilateral or regional PTAs, which is not a bad thing. I remain fundamentally optimistic about Japan’s ability to solve its basic problems. To read the full essay, please click hyperlinks right below the title.