Ports are jammed with ships carrying steel and machinery to China. Neon-lighted streets are awash with shoppers snapping up flat-panel-display televisions and late-model mobile phones. In corporate boardrooms, risk-taking and obsession with the bottom line have begun to replace the deep-rooted caution and clubbiness that has defined the local style of capitalism.
After more than a dozen years of stagnation, Japan is growing again. The world's second-largest economy is finally adding jobs, fostering consumer spending and shaking off its identity as a chronic drag on global prosperity. Government data released Friday showed 1.3 percent growth from April to June -- less than anticipated, but the fifth consecutive quarter of expansion. Corporate profits leaped by nearly half over that period.
For a world trying to bounce back from a downturn, genuine recovery in Japan's $4.3 trillion economy would provide crucial support, undergirding the rest of Asia and sparking increased trade and investment in the United States, the European Union and elsewhere. Already over the past year, as much as $227 billion has poured into Japanese stocks, as investors sense value where they had previously seen bad debts and weak companies.
Only one question remains: Can it last?
As economists survey Japan's success, they are divided on whether the country's long slide is really over. Some say Japan's growth reflects a successful restructuring that, while perhaps incomplete, has begun cleansing banks of the bad debts left over from an explosion of free-wheeling real estate investment in the 1980s. Others say Japan's economy remains unsound, that its banks still waste capital supporting unprofitable businesses and that its current growth is fueled only by a potentially short-lived spike in exports.
"Nothing has changed," said Hiromichi Shirakawa, chief economist at UBS Securities Ltd. in Tokyo. "If exports had remained weak last year, there is zero chance Japan would have recovered."
The dueling notions of where Japan stands are of more than academic import. Other countries in Asia, notably China, now grapple with their own bad-debt problems and confront similar debates about whether they must accept bankruptcy and unemployment to clear out failed businesses, or whether their banks can nip and tuck their way back to prosperity.
At the center of the debate in Japan is Prime Minister Junichiro Koizumi, who took office in 2001 promising a crusade against traditional ways of doing business. He argued that Japan needed to fundamentally remake its economy -- beginning with a purge of nearly dead "zombie" companies that banks continued to prop up in the name of stability, thus depriving capital to new ventures that might turn a profit and create jobs.
Koizumi also vowed to privatize the postal system, which holds more than $3 trillion in household savings but has often invested that capital in money-losing ventures. He promised to rein in public debt by slashing public works projects and pursuing "reform without sanctuary." His finance chief, Heizo Takenaka, famously declared that no company was too big to fail.
From the beginning, Koizumi was dogged by adversaries within his ruling Liberal Democratic Party, which has traditionally drawn support from the construction and real estate industries. Rather than Koizumi's harsh medicine, they argued for a remedy more in line with Japan's economic traditions -- tax breaks to stimulate investment, a bigger budget for government construction projects, and an infusion of credit to encourage people to spend. Japan, they contended, could grow its way out of trouble. As companies expanded, bad bank loans would shrink into a smaller percentage of overall lending with no bloodletting required.
Three years later, neither side has seen its full program pursued, muddying judgments about the recovery.
Koizumi has significantly cut public works spending, denying construction companies the pork-barrel "roads to nowhere" that had been their staple. Under Takenaka's supervision, the Financial Services Agency has forced banks to more strictly account for risky debts and write off bad loans, aided by a $113 billion taxpayer-funded bailout package. Between March 2002 and March 2004, total bad loans were slashed from nearly $400 billion to $242 billion, according to government data. The new climate has pressured banks to stop lending to the worst of the zombies.
"They have stopped the creation of new bad loans," said Robert Feldman, a managing director at Morgan Stanley in Tokyo. "The banks are in much better shape."
Many read the pending merger of two of Japan's largest banks, Mitsubishi Tokyo Financial Group and UFJ Holdings, as proof that companies feel pressure to improve or die. The brewing possibility of a third bank, Mitsui Sumitomo, mounting an unprecedented hostile offer for UFJ has further increased the sense that the old rules no longer apply.
"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.
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."