A year ago, the State of Michigan was on its financial deathbed with a $1 billion deficit.

On top of the recession that afflicted the whole nation, Michigan suffered the added malaise of Japanese competition for its vital auto industry.

Ironically, it was the Japanese who provided a remedy for the state's fiscal ailments after U.S. banks refused to lend Michigan more money. As what they called a gesture of "good will," five Japanese banks agreed to provide a $500 million letter of credit as backing for a loan. It was believed to be the first time in history that foreign lenders agreed to secure the debts of an American state.

Now the domestic auto industry is flourishing again and Michigan is negotiating a new state borrowing plan designed to cut Japanese participation in the state's financing to only 10 percent, Gov. James J. Blanchard told the New York financial community yesterday.

After a meeting with Moody's Investors Service, at which he outlined the state's plans for economic development and diversification, Blanchard expressed optimism that the credit rating service would soon bestow its highest investment grade rating, MIG 1, on Michigan's new short term borrowings. The state needs to borrow $500 million by the start of its 1984 fiscal year on Oct. 1. Citibank heads a list of banks that are expected to put up the money.

When Blanchard became governor last January, Michigan had an accumulated deficit of $1.7 billion. Its long term bonds, which once carried Moody's third highest rating, AA, now are tagged with the lowest rating given to those of any state, Baa 1. (Moody's says that rating describes medium grade bonds of a speculative nature lacking a guarantee of certain protections over any length of time.) Moody's also cut the state's rating for short term notes to MIG 3, its lowest category, but raised it to MIG 1 after the Japanese letter of credit was received.

Standard & Poor's Corp., put the state on its credit watch for three months--raising a red flag to investors--and then restored its prior rating of A+, the lowest state rating. It is a distinction Michigan shares with New York and Pennsylvania.

Blanchard said the state's finances have turned around because he raised income taxes and cut the budget. As a result, the state expects a slight surplus in both the current fiscal year now ending and the next, according to treasurer Bob Bowman.

Consequently, Michigan has been able to cut its financing costs almost in half. The new line of credit will cost but $3.5 million, compared with the $6 million cost of the Japanese letter of credit and the $20 million the state would have had to pay were it not for the loan guarantee.