Has the Japanese economy turned the corner? The first quarter GDP numbers are encouraging and suggest that not only that the recovery is for real but that deflation is ending. Having grown by 1.5% in 2013, the econonmy grew by 2.8% in the four quarters to March. But what is really significant is that domestic demand grew by 4.6% in that period made up of 2.1% in personal consumption, 0.2% in government consumption and 2.3% in investment spending. In other words, growth in the domestic economy outstripped the ability of the economy to meet that demand and the balance was made up by a surge in imports and a fall in inventories. It is equally encouraging that nominal GDP is also growing, by 0.9% in 2013 and by 2.5% in the four quarters to March. This suggests that the deflator is still negative, i.e. deflation is still present. However, looking at the nominal and real components of domestic demand, there is evidence of substantial inflation of around 3%, with real growth rising by 4% and nominal growth by 7%. This backs up the CPI data where the price level has risen by 2.4% in the year to May (0.1% if food and energy are excluded). With 10 year bond yields at 0.6%, real interest rates in Japan are now very much negative, another precondition for sustained long-term growth. As usual with economics, not everything is rosy; some of the recent monthly data has been downbeat, most noticably the PMI numbers which are back below 50. But the numbers do point to a genuine recovery, helped by the fall in the yen and not only has this benefitted Japan but also its trading partners given the surge in imports.