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Workers on the assembly line at the Japanese-owned Combi Stroller factory in Guangdong, China

Here Comes The Sun
	After years of gloom, Japan's economy is finally blossoming. And this time the recovery seems for real
	By Jim Frederick Tokyo

Posted Monday, April 5, 2004; 21:00 HKT
Walking into Steelmaking Plant No. 2 at Nippon Steel's massive Kimitsu Works near Tokyo is like entering a volcano. Insulated railway cars arrive every few minutes loaded with molten pig iron, which is poured into immense cauldrons, mixed with scrap metal, and reheated to 1500°C. Flames shoot into the air, and the waste slag gurgling from Oxygen Furnace No. 1 flows like a river of fire. The result of each 25-minute inferno, says senior manager Tsutomu Tsunezumi, is 300 tons of pure liquid steel, which is shaped into the girders, plates, sheets and coils that are used as components in everything from cars and cell phones to ships and skyscrapers worldwide. Nearby, an overhead crane loads Oxygen Furnace No. 2 with a jumble of scrap metal. Over the hellish din, Tsunezumi yells, "Ordinarily, we operate one furnace and rest the other. But things have been so busy lately, we've been running them simultaneously for months." After losses of nearly $500 million two years ago, Nippon Steel expects to report a $300 million profit for the fiscal year that ended on March 31, aided by the record 9.25 million tons of steel the Kimitsu Works produced in 2003. "Demand has been huge," says Tsunezumi.

Nippon Steel is just one of many Japanese companies that, after years of disappointing results, have started to burn brightly again. For the past few quarters, the perennially sick Japanese economy has been growing at a pace few thought possible. In the last three months of 2003, Japan's real GDP increased at an annualized rate of 6.4%, surpassing the U.S. rate of 4.1% over the same period and marking Japan's best quarterly performance in 13 years. In the 12 months prior to March 31, Japanese stocks posted their best annual performance in 31 years, with the Nikkei-225 Stock Average surging 47%. The country's employment outlook is more promising than it has been in a decade. Even ratings agency Standard & Poor's, which incurred the wrath of the government with a series of high-profile downgrades that left Japan with a bond rating comparable to some Third World countries', recently raised its credit outlook for Japan from negative to stable. And the yen hit a four-year high against the dollar last week, fueled by mounting optimism over the Japanese economy.

Japan's long-suffering citizens are at last allowing themselves a degree of optimism after years of borderline despair. "There were times I thought I'd have to hang myself," says Dai Tajima, a 49-year-old construction worker from Tokyo who a few years ago struggled to support his family. He says work is steadier these days and that he fears the future less than he used to. "It's nothing like the bubble years," he says, "but things are improving."

Can the good cheer last? Since the bursting of its 1980s asset bubble, Japan has experienced three aborted rebounds, all of which fizzled due to governmental bungling and an overreliance on exports to bail out the nation's anemic domestic economy. However, even some of Japan's most skeptical analysts have come to view the current recovery as real, braced by an improving global economy, new demand from China, and economic reform at home. "Many of the pieces that will spur a broad-based recovery are finally in place," says Jesper Koll, Merrill Lynch's chief Japan analyst. Failed recoveries in the 1990s were often underwritten by wasteful public-works projects, such as unnecessary bridges or dams, which provided a quick adrenaline shot but minimal lasting economic value. Not this time. Public-works spending has fallen an average of 6 percentage points a year since Prime Minister Junichiro Koizumi took office in 2001, and the recently approved 2003-04 budget features an additional 3.5% cut. "Sentiment is different this time," says Shuhei Abe, president and CEO of Tokyo-based investment firm Sparx Asset Management. "People have much more confidence. They may not yet believe that everything is optimum, but they do believe that the worst is past, that we hit bottom a while ago."

For years now, late March has been a time of wide-scale panic as banks struggled desperately to avoid an end-of-the-financial-year meltdown triggered by gory revelations of their ever-worsening balance sheets. But this time around, top Japanese bankers reported to parliament that they were on track to meet the demands of Financial Services Agency Minister Heizo Takenaka, who mandated 18 months ago that bad-loan portfolios be halved by 2005. Bad loans at Japan's seven largest banking groups totaled $132 billion on Sept. 30, down 13% in a six-month period. Furthermore, the government's competent handling of a bailout of Resona Holdings (Japan's fifth largest bank) and nationalization of regional lender Ashikaga Bank last year have reduced fears of an outright collapse by one of the country's worst basket cases.

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