Quotes of the Day

Take a few numbers from the export column and a few statistics from the retail sales column, put them together, and presto! You've got yourself an economic recovery in long-suffering Japan. At least that's the rosy scenario painted by government leaders desperate to shore up their sagging popularity. The trouble is that to Japanese, the calculations look suspiciously like voodoo economics. "If the economy is getting better, we sure don't feel it," says 59-year-old Kinuyo Otsu while passing a Christian Dior shop in Tokyo's Shinjuku district. "Our husbands' jobs aren't stable enough, so we don't feel comfortable buying anything," Otsu says. "We use things until we wear them out."

That's hardly the sort of consumer confidence Prime Minister Junichiro Koizumi's cabinet is hoping to inspire. While the rest of Asia is showing strong signs of an economic rebound, Japan remains mired in its third recession since 1990. Getting the uncertain domestic consumer to start spending again is crucial to a lasting recovery. That's why even the most tentatively positive statistical signals are being viewed eagerly as light at the end of the tunnel—as happened last month when Koizumi aide Jun Saito declared that Japan had "hit bottom and from here on in we can expect a level or upward trend."

Is it possible, though, that this isn't merely wishful thinking? Japan, which a few months ago was widely considered to be on the verge of crisis, does in fact seem to be experiencing an old-fashioned, export-driven boost from a surprisingly buoyant U.S. economy and the weakening of the yen this year. Exports in April showed the first year-to-year increase in 13 months, and Japan's trade surplus, which has been steadily declining, grew again in the country's favor. Manufacturing and trade throughout Asia are perking up—economists are projecting Korea's 2002 gdp growth will near 6%, while Taiwan is expected to grow 3.7% and China as much as 8%. That in turn is spurring demand for Japanese parts and materials such as steel for Chinese factories.

Meanwhile, retail sales in Japan have momentarily stopped declining. This week, the country's gdp figures from the initial quarter are expected to show growth for the first time since January-March 2001. "The evidence is pretty clear that [the economy] has bottomed out," says a usually bearish Richard Katz, editor of The Oriental Economist newsletter.

The lingering question is whether this is a false bottom—a prelude to another period of stagnation. "Really, you just have to look at these numbers and sigh," says Andrew Shipley, chief economist at WestLB Securities in Tokyo. "I mean, we've seen this several times before. You get a recovery kick started by the comeback in the U.S.; then it stalls because there is no increase in domestic spending." During the so-called "lost decade," a long bout of recession was interrupted twice by short-lived recoveries.

If Japan is on the mend due primarily to U.S.-led demand for exports, the country could be poised for more pain. For one thing, the yen has been strengthening against the dollar, making Japanese exports less of a bargain overseas. That caused the Bank of Japan to go on a dollar-buying binge last week to keep the yen in check. Plus, there's no consumer boom inside Japan to take up slack if the U.S. recovery stalls. Businesses, operating with excess capacity, still aren't investing in new machinery, factories or technology, nor are they hiring. Unemployment remains high, while wages are falling; workers recently pocketed the smallest annual bonuses in a generation.

Then there are Japan's heavily indebted banks and massive public debt which totals 135% of gdp, a ratio that last week prompted Moody's Investors Service to downgrade Japan's credit rating to a level on par with Latvia. The country faces a host of other structural problems that aren't being fixed—and aren't likely to be if leaders exploit the whiff of a recovery to justify continuing a pattern of do-nothing politics. "The ruling party could use this as an excuse to stall reform," says Katsuya Okada, a Democratic Party leader. Any improvement "is only cyclical," Okada carps, "it doesn't represent a full recovery."

Last week the administration acknowledged the economy remains fragile and a rebound is by no means assured. "I'm not optimistic about the data," conceded Finance Minister Masajuro Shiokawa. No matter how you add them, numbers alone don't change a thing.

• TIM LARIMER Tokyo
• Japan recovery: little more than wishful thinking?