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Shoeshine Gauge Up Just a Little in Japan

Trade surplus shrinks as economic recovery builds

Shigeko Osaki measures the strength of Japan's economy by the number of feet placed in front of her.

Ms. Osaki shines shoes in front of Tokyo's huge Shinjuku railway station, a job she has done for 33 years. Times were so good, during Japan's "bubble economy" of the late 1980s, that Osaki and a friend could afford vacations abroad. With her hair in a kerchief as she buffs and polishes, she warmly remembers her cruise on one of the boats that carry tourists along the Seine in Paris.

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By her reckoning, Japan's economy has been "lousy since the bubble burst" - regardless of the increasingly confident assessments that Japan is headed out of its longest postwar recession.

Good news on business pages notwithstanding, Osaki says she isn't adding a lot of new customers these days. "Having your shoes shined is luxury," she notes.

Her assessment underscores one of the realities of Japan's nascent recovery: It has a lot of gaps. While the stock market is up and big Japanese corporations have been reporting that they are back in the black after years of shrinking sales and profits, many other aspects of the economy remain troubled.

One of the gaps is in the country's financial industry. Seven of Japan's top 11 banks on Friday reported losses for the fiscal year that ended in March. They and other banks took write-offs against the huge amounts of bad loans on their books - which the government estimates at $330 billion - and diverted money into reserves against future losses.

"In order to say the worst is over, we will probably need one more year," Finance Ministry official Sei Nakai told reporters last week. Private analysts note that few efforts have been made to liquidate the land and other property the banks hold as collateral.

But big Japanese companies in other industries have had brighter news to report recently. Honda Motor Company last week said consolidated pretax profits in the fiscal year ending in March were 115 billion yen ($1.1 billion), up 22 percent from the previous year. Meanwhile, many other major manufacturing and electronics companies returned to profitability, often citing increased demand for their products and Japan's record-low interest rates.

Another indication of corporate health has come in the form of companies announcing major investment plans. Electronics giant Hitachi Ltd., for example, last month said it would invest 120 billion yen in a new factory to produce 64-bit computer-memory chips. Daio Paper Company said it plans to spend 180 billion yen on two new plants, also in Japan.

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Still, the main force behind the recovery, economists say, is government fiscal stimulus, not big spending by business. The government has been pouring huge amounts of money into economic programs. That spending has created a government deficit that worries economists and bureaucrats; increasingly it will be up to individuals and companies to maintain the growth of the economy.

"Whether this recovery continues or not is totally dependent on private demand, including capital expenditure and personal expenditure," says Yoshio Nakamura, an economist at the Keidanren, Japan's leading federation of business groups. He acknowledges that small and medium-size companies are not rebounding to the same degree that big companies are.

Economist Johsen Takahashi of Tokyo's Mitsubishi Research Institute Inc. warns of a "demand shortage that will result in a slower economy." He and other specialists say that personal consumption will not increase unless real incomes go up and the employment situation brightens.

Japan's unemployment rate has risen in the past couple of years as companies have found ways to trim workers in order to cut costs. The jobless rate among recent entrants into the work force - those under 24 - is as high as 8 percent.

Mr. Takahashi sees little that will improve the job market, and thus little hope that personal consumption, which forms the bulk of domestic demand, can drive a continued recovery.

What a revived Japanese economy means for the rest of the world is unclear. Japan's notorious trade deficit has been plummeting in recent months, confirming that the country is much more receptive to imports than it once was. Greater access to Japan's markets is good news for foreign producers.

But some observers have begun to warn that Japan's export industries may again become a threatening force. Many Japanese firms have undergone partial restructuring at home and moved manufacturing facilities closer to sources of cheap labor - a combination that will make them into harder competitors.

And, with the value of the US dollar rising, Japanese goods are more competitive in American markets.

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