Japan Journal

DAWN MATUS

TOKYO - Japan has spent more than a decade in or near recession, but 2003 may go down as the year when the world's second-largest economy finally sprang back to life.

The turn of events was surprising, given that the year got off to a shaky start. Early on, speculation of yet another recession was rife. The stock market hit 20-year lows in April, fueling renewed fears about the nation's weak banks.

Some said those worries were justified in May when Resona Holdings, Japan's fifth-largest lender, revealed that it was dangerously low on capital and would accept a government bailout.

As the malaise continued and political opposition threatened his economic revival efforts, Prime Minister Junichiro Koizumi's popularity ratings sank.

By fall, the gloom began to lift as a number of positive signs suggested Japan was finally entering the recovery track.

In an astonishing development, Japan reported that second-quarter growth reached an annualized 3.9 percent. That beat most estimates and also meant Japan's economy outpaced the U.S. economy during that period.

REMADE IN JAPAN: Japanese banks like Resona hit rough waters in early 2003 but by year-end Japan Inc. was talking about possible economic recovery. Photos: Greg McCartney gmccartney@primelightphoto.com

In late September, the Japanese government raised its growth forecast to 2.1 percent for the 12 months prior to March 31, the fastest rate in three years and more than triple the previous estimate.

Outsiders also grew optimistic. The International Monetary Fund raised its 2003 economic growth forecast for Japan from 0.8 percent to 2.0 percent.

Japanese stocks, meanwhile, went on a tear. The Nikkei 225 average rose about 40 percent between April and October, as overseas investors piled into the market.

There were other bright spots. Unemployment stabilized after touching record highs, corporate profits showed signs of continued improvement, and large firms reported a pickup in both capital investment and business sentiment.

Bolstered by these developments, Koizumi was reelected president of the ruling Liberal Democratic Party on Sept. 22, handily defeating challengers who opposed his "no pain, no gain" economic reform agenda.

However, ordinary citizens were not convinced by the prime minister's claim that his reforms had paved the way for the nascent recovery.

"I don't think that's the reason," says Kazuo Matsuyama, 61, adding that credit should be given to Japanese companies that have finally bitten the bullet on restructuring. "As individual Japanese companies improve, the economy is gradually getting better too," he says.

"I think the reforms have played a small role in the turnaround, but I don't think that's all there is to it," says Shunsuke Yamada, 35.

At the same time that they expressed misgivings about the effectiveness of reforms, Yamada and other people interviewed for this article agreed that Japan needs to stick with a bold approach if it hopes to put its longstanding economic problems behind it.

Indeed, as 2003 draws to a close, Asia's largest economy still faces challenges on a number of fronts. While there are signs that deflation is abating, Japan has not beaten it yet. Consumer spending remains lethargic. Profits are improving in the banking sector, but the industry has not ended its battle with bad debt. Public debt is huge, at an estimated 130 percent of the GDP. Most alarming to businesses, the yen began surging this fall, threatening the profitability of Japanese exports.

Granted, at long last, there are signs of hope. However, pessimists recall that over the past decade, Japan's economy has had a number of false starts.