Strong Yen Belies a Worrisome Japanese Economy

Investors have enough to worry about: the crisis in the euro area, the uneven U.S. recovery and the probable hard landing in China. So I hate to be the bearer of more worrisome tidings: They also need to start keeping a watchful eye on Japan.

The world’s third-largest economy has been in a deflationary depression for two decades, with very low, if not negative, gross-domestic-product growth, and deflation more often than inflation. True, first-quarter GDP rose 4.1 percent at annual rates after a flat reading in the fourth quarter of 2011. The strong showing is largely attributed to increased domestic demand due to government spending and incentives to help the country recover from the March 2011 earthquake and tsunami, and similar rates of growth aren’t expected in coming quarters. The first-quarter GDP deflator, a key price indicator, rose 0.02 percent, its first increase in more than three years. Prices, excluding food and energy, fell 0.3 percent in April.