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Japan grew to be the world's second largest economy based on a strong export economy. Over the past few years, however, the Japanese economy has suffered from slow growth, reduced business spending, and relatively high unemployment. The turnaround in this case comes not from its still steadily strong exports, but rather from its recovering domestic demand.
"Before, growth was reliant on the life support of external demand, "said Stefan Worrall, an economist in the Tokyo office of Credit Suisse First Boston. "Japan is moving back to a more normal economy where domestic demand is the biggest driver."
In the fourth quarter of 2005 alone, the Japanese economy grew at 5.5 percent, bringing the annualized growth rate in calendar 2005 to 2.8 percent. Such strong growth places the Japanese economy on track to beat the government's estimate of 2.7 percent growth for the current fiscal year, which ends March 31, 2006.
"Japan's economy is back, and with a vengeance," said Mr. Worrall. "This was a pretty fantastic year." This "fantastic year", came at a time when the U.S. economy grew at a disappointing 1.1 percent and the European Union grew by only 1.3 percent in 2005.
Economic analysts said the pick up in consumption demand was further evidence that Japan's recovery would be sustainable. They said that higher wages and increased job availability drove consumption spending. The stronger domestic demand leads to higher business profits. Companies then raise salaries and increase hiring to attract needed resources, which gives households more money to spend. This healthy domestic demand cycle-sometimes called a virtuous circle--should result in a sustainable recovery of the Japanese economy.
Economists called the new growth rate figures strong new evidence that Japanese companies have finally eliminated excess debt and factory capacity they had built up in the overheated 1980's. Now that this restructuring period is over, corporate Japan is ready to invest again in new factory lines and more workers. Companies are also much leaner and more competitive, economists say.