Japan is not currently in recession as commonly defined (that is, two quarters of negative growth, or a year-on-year decline). But the level of GDP failed to recover fully in the third quarter of last year from the decline in the second, while domestic demand actually fell outright in both quarters. As such, talk of a marked slowdown in 2008 appears to miss the point that this slowdown may already have happened. There are still some good reasons to worry, especially about the outlook for consumer spending. But provided household confidence starts to recover soon, we expect Japan to be one of the few major economies to grow more quickly this year than last. Indeed, higher interest rates might actually help the recovery by increasing the income of Japan’s savings-rich households.
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