"People have bought the story that something is different now," Feldman said.
But in key ways, Koizumi's administration has fallen short of his bold talk.
Ashikaga lent money to about 40 hotels in the hot-spring resort town of Kinugawa, very few of which are attracting enough customers to make full repayment on the loans.
(Peter S. Goodman -- The Washington Post)
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Huge unprofitable businesses such as the retail chain Daiei have been bailed out, precisely because they were judged too big to fail. Government debt has actually increased during Koizumi's term, climbing from about 130 percent of national output to close to 150 percent. The postal service remains in government hands, though the Japanese Cabinet recently approved a plan to split it into four private businesses, and the gain-through-pain mantra has been squelched in favor of a new emphasis on reviving troubled firms. Real estate values in Tokyo, down 80 percent since the high-rolling 1980s, have fallen every year for the last 12, according to government data.
Many economists say Japan has not been fixed so much as lifted by surging export demand from China as well as the United States and Europe -- the same sort of spike that brought short-lived revivals in the mid-1990s, 1999 and 2000.
"Japan's gotten lucky," said Richard Jerram, chief economist at Macquarie Securities (Japan) Ltd. "If America blows up tomorrow or China blows up tomorrow, Japan goes back down."
The point was underscored this week when the government warned that exports are slowing. China has tightened credit to fast-growing areas such as real estate and automaking, likely tamping demand for Japanese products.
Ultimately, say economists, Japan's future rests on its ability to shake deflation -- a cycle of falling prices which increases debt, dilutes profits and limits incentives for businesses to invest. That, in turn, depends in part on the behavior of Japan's banks and the willingness to allow failed companies to disappear.
So far, the record is mixed. Takenaka has successfully altered how Japan's biggest banks operate, but regional institutions, which account for two-fifths of all lending, remain little changed, analysts say.
The government recently nationalized one of the worst-off regional institutions, Ashikaga, after an inspection found billions of dollars in undisclosed bad loans. Government handlers now hope to clean up Ashikaga's books and sell the bank.
They expect to hand some loans to the Resolution and Collection Corp., an institution similar to the American Resolution Trust Corp., which oversaw the cleanup of the U.S. savings and loan industry in the 1980s. Though the process could send debtor companies into bankruptcy, local officials expect most borrowers will be spared through a combination of debt forgiveness and support from the Industrial Revitalization Corp., an institution Koizumi created to revive troubled firms.
"There is an element of supporting local jobs," said Hiroki Otsuka, a deputy manager at Ashikaga's headquarters in Utsonomiya. "Our policy is to collect as much money as we can while keeping our borrowers alive."
The hot-spring resort of Kinugawa is emblematic of the dynamic that has developed. Ashikaga lent money to about 40 hotels in Kinugawa, transforming inns featuring bamboo and rice paper screens into concrete hulks filled with Tokyo office workers. Arriving by the busload for company retreats, they soaked in rooftop spas and sang karaoke long into the night.
As Japan's economy turned down, so did the hotel business. Between 1993 and last year, the number of annual guests dropped from 3.5 million to 2.5 million, according to a local trade association. The average $200 room rate fell as much as 50 percent.
Though only a handful of the hotels made their full loan payments to Ashikaga, the bank continued lending. Not a single hotel has closed. They are instead locked in a sort of economic netherworld -- open, but unable to pay their loans, turn a profit, or afford the investments that might attract fresh business. The biggest property in town, the Asaya -- a 361-room behemoth with a 12-story atrium and crystal chandeliers over a marble lobby -- owes $180 million. It has slashed its full-time workforce from 300 to 150. Upholstery and carpets are worn and stained. Bathroom tiles are grimy.
Bank officials are now going from hotel to hotel, seeking to restructure debt, officials confirmed. Anxiety is high, but so is confidence that Japan's aversion to failure will keep the credit flowing.
"We have to live alongside the community in which we operate," said Junichi Yokoyama, an Ashikaga spokesman. "We have to coexist side by side. We can't just take their collateral."
