It may come as a bit of a surprise to learn that Japan's sluggish economy expanded for four straight quarters in calendar 2002. The truth is, though, it expanded only after the effect of deflation, or the continued decline in the prices of goods and services, was applied. The nation's deflation-adjusted (real) gross domestic product in October through December increased 0.5 percent from the previous quarter, or at an annualized rate of 2 percent, according to the latest GDP report from the Cabinet Office. With real GDP for all of 2002 climbing 0.3 percent, Japan has posted four consecutive calendar years of growth since 1999.

Exports, which surged 4.5 percent quarter to quarter, provided the main thrust of growth, with external demand -- exports minus imports -- boosting GDP by 0.3 percent. However, foreign sales remain unstable, partly reflecting the prospect of war and the slowing of the U.S. economy. In the previous quarter, July through September, exports contributed negatively, by minus 0.2 percent, to GDP growth.

The main drag on the economy continues to be weak domestic demand. In the October-December quarter, the rate of internal growth dropped to 0.2 percent from 0.9 percent in the previous three-month period. Thus GDP growth needs to be taken with a grain of salt, as the domestic economy is showing increasing signs of weakness.