Gross domestic product figures for Japan are to be released shortly and they are expected to show that the economy contracted in the quarter ending December 2002. Japan's economy had experience three straight quarters of weak growth starting with the beginning of 2002, prior to this expected contraction. The primary reason for the economic turnaround is consumer demand. Consumer confidence in Japan's long-term prospects is ebbing and this is reflected in stagnation of consumer purchases. Amid the gloom of record 5.5 percent unemployment and a 20-year low stock market, export sales to Japan's Asian neighbors have strengthened and could possibly revive Japan's economy.

Japan's exports to its neighbors grew by 14 percent in 2002. Exports to China grew by 32 percent, compared to an increase of 1 percent in U.S. exports and a decrease of 2 percent to European-bound goods. Exports to China are about one-third of the value of U.S. exports; nevertheless, a 32 percent rate of growth is impressive and, as the Chinese people are eager to get Japanese products, further growth is expected.

Japan has increased its production capacity in China. Much of Japan's exports to China consist of capital goods to be used in Chinese factories, many of which are owned by Japanese companies. While domestic sales for these firms are stagnant at best, Chinese sales are booming. For example, Honda Motor Company's auto production in China is expected to double to 112,000 vehicles in 2003. Chinese firms are also demanding steel, cement and chemicals, giving those domestic industries a boost.

The critical question that analysts are trying to address is which strong export sales will be sufficient to pull Japan out of its current slump and 10-year malaise. Economists expect growth to pick up in the current quarter, but are not expecting a significant expansion. Japan is saddled with many structural problems that must be addressed before the economy can really turn around.

(Updated April 3, 2003)