Observed over the period of a year, a span that removes the effects of seasonal adjustment, the picture changes once again. In this sense, the 12 months through June were characterized by the often hypothesized but seldom realized phenomenon of export-led growth. However, given the strength of the yen in recent months, the fact that net exports were maintained at a constant level in the spring is a modest surprise. Taken together, Japan's quarterly, semiannual and annual GDP data point to an economy in a rather typical, if slow, recovery mode. In the face of the probable slowdown of growth in the United States and elsewhere as well as the continued strength of the yen, Japan's real exports will not increase at double-digit annual rates, as they have in three of the past four quarters.
Public spending is even more of a problem over the long run.
Japan's budget deficit is the world's largest. Moreover, the nation's accumulated public debt, the result in part of one stimulus package after the other over the past eight years as well as sluggish tax receipts for most of the 1990s, is now, by some measures, also the largest on the planet. The drop from Aa1 to Aa2 probably will modestly increase the cost of servicing the debt. Perhaps more importantly, Ministry of Finance officials likely will seize on the rating change as evidence that Tokyo needs to swallow the bitter fiscal medicine long advocated by the ministry. Should MOF prevail and Tokyo end up later this year with only a tiny stimulus package, one that puts public works on a sharply declining trajectory, the economy still might expand, but it would do so more slowly.