The Japanese economy faces a bumpy road. Japan's gross domestic product in the last quarter of 1999, October through December, shrank 1.4 percent from the previous three-month period, posting negative growth for two straight quarters. In annual terms, that works out to minus 5.5 percent, according to an Economic Planning Agency report released this week. The biggest reason for the fall is that consumer spending -- which makes up about 60 percent of GDP -- dropped as a result of reduced yearend bonus payments. The more general reason is the erosion of consumer confidence stemming from relentless corporate moves to restructure, in particular layoffs and pay cuts. This is a sure sign that the economy is going through a period of structural readjustment.

EPA Director General Taichi Sakaiya emphasized that the two consecutive quarters of negative growth was due to temporary factors and, therefore, should not be taken as an indication that the economy is sliding back into recession. He expressed confidence that the official growth target of 0.6 percent for fiscal 1999, which ends this month, can be achieved.

In fact, since the beginning of the year the economy has shown promising signs in some areas, such as production and corporate earnings. Now the EPA is reportedly inclined to take a more positive position in its forthcoming monthly economic report for March. On the face of it, the agency has good reasons to be optimistic.