Japan's economy is gaining strength.

Arguably, no issue has dominated market news from Japan over the past few years as strongly as consumer prices. The Bank of Japan (BOJ), the country's central bank, has been battling deflation, and even now, when consumer prices are clearly increasing, as indicated by the graph above, the BOJ is not willing to declare victory.

A story posted on the website of news aggregator International Business Times (IBT) on October 27, 2006 said, "Recent government data have shown that deflation seems to be easing, but the government has not yet declared that the danger of deflation is over." The reason was reported by IBT in a quote by Japan's Chief Cabinet Secretary: "The announcement on overcoming deflation will be decided on various factors, not just one or two."

It is tempting to assign the BOJ's caution to the very long battle it says it had with deflation. But there is some debate in the economic literature whether "deflation" is a useful concept.

The BOJ's complaint is that declining prices prevented the economy from growing. This implicates consumer spending in the "sluggish growth" debate.

There is no question that GDP growth for the world's second biggest economy has been disappointing-but hardly disastrous. From 1995 through 2005, according to International Monetary Fund (IMF) statistics, Japan's economy has grown every years with the exception of 1998 when it contracted negative 1.8 percent and 1999 when it contracted negative 0.2 percent. These were the years of the Asian financial crisis, which affected every Asian country.

One is hard pressed to characterize the long period of declining prices in Japan as "deflation" simply because the economy is so large and because it continues to grow.

Suspicion arises that the reasons for the protracted decline of consumer prices has deeper, more complex origins.

One reason, noted often in these pages, is that Japanese consumers are savers, not spenders. They favor cash over credit.

A fascinating December 5, 2006 United Nations University report titled, "The World Distribution of Household Wealth," says this: "In Japan the preference for liquidity has a long history but also reflects lack of confidence in real estate and shares after their poor performance in the 1990's."

Simply put, Japanese consumers are not willing to either spend or invest. And declining prices, after all, add value to their liquid positions.

Foraging deeper still, one reflects on the dominance of the Japanese government in the country's economy. Only recently has the government divested itself of numerous public corporations. And as a kind of corollary to that reform it has also relaxed restrictions on starting a business. Almost immediately the number of new business filings shot up dramatically.

Conclusion: Japan's economic progress is much more a function of its uniquely structured corporate environment and less a function of its consumers or entrepreneurs-though this latter category is obviously set to change significantly.

On December 1, 2006, the Associated Press (AP) reported that Japan's unemployment rate dropped from 4.2 percent in September 2006 to 4.1 percent in October 2006. For 2006, the IMF estimates the unemployment rate will be 4.1 percent declining slightly to 4.0 percent in 2007. As a result, said the AP, consumer spending was likely to increase.

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