Gross domestic product and industrial production - The economy was in recession most recently (as measured by year-over-year gross domestic product) from the second quarter of 2001 to the third quarter of 2002. However, key sectors of the economy and especially domestic demand have been depressed even longer. There are signs that the domestic economy is finally turning around even though the overall economy is still very much reliant on the growth in the U.S. and China, the country's two largest export markets.

Japan was plagued by dismal economic performance for over 10 years. The recovery has been erratic and volatile. GDP growth was 0.8 percent in the second quarter of 2006 and when compared with the previous quarter was up 0.4 percent and 2.7 percent on the year. Preliminary third quarter GDP data show that the economy picked up slightly. GDP was up 0.5 percent on the quarter, 2.7 percent when compared with the same quarter a year ago and at a 2 percent annual rate.

Deflation or Inflation - Whether Japan has beaten deflation depends upon which measure of price change is used and which version. According to the 'old' version of the CPI, prices had increased for six months. However, the 'new' CPI which was released for the first time in August, showed increases for only three months. This reinforced the belief of some government members that the Bank of Japan increased interest rates prematurely. Some also think that the GDP deflator should be used to measure whether the economy is truly no longer in deflation's grip. The financial system has stabilized, the corporate sector is more resilient, labor markets have become more dynamic, and fiscal consolidation is under way. As a result, the economy appears to have recovered from deflation. For those who borrowed, deflation was a nightmare because the burden of debt becomes heavier as time passes. For consumers, deflation is a delight: the purchasing power of money grows when it is not spent. But that encourages consumers to save, not spend, and makes it more difficult for debts to be repaid. In September, the nationwide CPI was up 0.6 percent on the year but was down 0.5 percent when excluding food and energy.

Japan released an experimental alternative core CPI measure with its November 2005 data. The old core CPI removes only fresh food from the total index while the alternative measure removes energy as well. The new core was formally introduced in August 2006.

Unemployment - The unemployment rate edged up to 4.2 percent from 4.1 percent in July and August. There are signs that the labor market is improving as the number of jobs available is finally matching the number of unemployed seeking work.

The unemployment rate hints that the aggressive job cutting by many Japanese companies has done its job and there are signs that companies are again beginning to hire new employees. Many of the earlier job cuts were made at overseas operations, reflecting the cultural reluctance to dismiss domestic staff in Japan. Employees at larger companies generally stay with the same firm throughout their careers.

Merchandise trade imports and exports - Japan is not particularly open to foreign trade. As a percentage of GDP, the value of Japan's 2001 two way foreign trade was just 16.8 percent while in Germany, for example, was 57 percent. The closed nature of Japan's economy is also apparent in comparisons with other countries in Asia such as China, which saw foreign trade reach 42.4 percent of GDP. This is largely owing to official and unofficial restrictions on merchandise imports. These remain in place despite pressure from the United States and other trading partners in order to protect less efficient sectors of the economy. This lack of openness to foreign trade has often been cited as one of the reasons for the persistence of the structural problems in the country's economy in general and the poor productivity of companies in the non-tradable sectors in particular.