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After nearly two years of stubborn optimism, Japan's economic recovery seems to be skidding to a halt. Last week's government figures showed that the country only narrowly avoided a return to recession—defined as two consecutive quarters of decline in gross domestic product—with 0.1% gdp growth in the third quarter following a 0.1% contraction in the second. "We are entering a slow patch, and there is no obvious exit," says Peter Morgan, chief economist at HSBC Securities in Tokyo.

Blame it on Japan's ever reluctant consumer. Household spending has long been the missing piece in Japan's recovery puzzle: every time sustainable domestic demand seems to be around the corner, wallets snap shut again. Part of the problem this time is that companies have been loath to share their record profits with employees. "Economic recovery started in early 2002, and worker income still has not risen," says Jeffrey Young, head of economic and market analysis at Nikko Citigroup in Tokyo. As a result, domestic spending in the third quarter edged up only 0.2%.

Japan has been buoyed by vibrant exports and strong capital investment. But these could be stifled by high oil prices, a slowdown in the U.S. economy or a cooling of China's gangbuster growth. Ongoing weakness in the U.S. currency is also a major concern: the dollar recently sank to a five-year low against the yen, making Japanese goods more expensive in America. Automaker Nissan estimates that the company's profits could fall by $105 million for each one-yen drop in the value of the dollar.

Still, the decline may be temporary. Japan Inc. has fixed many of the structural problems that snuffed out previous recoveries: deflation has slowed, banks have largely cleaned up their bad-loan portfolios, and successful company restructurings are on the upswing. At a press conference last week, Economic and Fiscal Policy Minister Heizo Takenaka claimed to be unfazed by the new numbers, calling them a "minor adjustment phase in an upward climb." If only Japanese consumers were convinced.