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Bye-bye Banzai?

Japan was down and out in the 1990s, but the world’s second-largest economy - the one that was set to eat U.S. industry for lunch - has bounced back like a champion in the 2000s. Or has it?

Here in Tokyo these days, there appears to be a widespread feeling of – well, to call it optimism might be going too far. But the improvement in mood over the funk that dominated this city like a vast greasy cloud for more than a decade is at least noticeable and, to the inhabitants of this place, most heartily welcome.

The renewed vigor of Japan’s capital city and of the country as a whole derives primarily from one source. It is generally believed here that the economic reforms instituted by Prime Minister Junichiro Koizumi during his tenure as premier from 2001 to 2006 have finally pulled Japan out of the Lost Decade doldrums – the prolonged recession that resulted when the bubble of national supergrowth finally burst on the last day of 1989.

As proof of their current resurgence, the Japanese point to the fact that they are now experiencing the country’s longest period of sustained growth since World War II. And sure enough, dozens of construction cranes dance at skyline height today as new office and apartment buildings rise throughout the core of this enormous city. Even an out-of-the-way Tokyo neighborhood like Asakusa – a few square kilometers of old housing, tiny shops, the Sensoji Buddhist temple and an entertainment-cum-dining-cum-red light district – even Asakusa is spruced up and humming as it celebrates the return of tourists from home and abroad.

Yet beneath the surface of go-go Tokyo is a river of anxiety and an undercurrent of real fear.

A few years ago, I was asked to name the country I thought would be “the next Japan” – that is, the country that would eat industrial America’s lunch in the coming decades, just as Japan itself had done in home electronics, steel, automobiles, shipbuilding and the like in the 1970s and 1980s.

“The next Japan?” I said. “Why, that would probably be Japan.”

My thinking was that even at the nadir of their decline, the Japanese were still the Japanese. With a seemingly infinite supply of brains, inventiveness and determination, they would not possibly allow themselves to be sidelined forever. My belief was reinforced as early as 1997 by the introduction in Japan of the Toyota Prius, the world’s first production model hybrid automobile. And a few years later, when the Prius took the American market by storm, I thought I had really been onto something.

Then again, maybe not.

In Japan right now, consumer spending – which should account for more than half of all economic activity – is just as dormant as it had been for more than a decade. Indeed, recent figures show domestic consumption actually falling in every month of 2006.

In addition, the value of the Yen has been rising slowly but steadily against the dollar and the Euro for two years. That is decidedly bad news for a country that lives on exports. And the bank of Japan is now hinting rather broadly that it will resume raising interest rates soon, which would only add to the Yen’s strength and further dampen domestic demand for big-ticket items.

Although Koizumi did manage to sweep away some of the roadblocks that had stymied Japan’s recovery, he never really dented the stone wall of system-wide constraints on change that are shored up by the most powerful elements of this society – the huge industrial conglomerates, the enormous constituency of farmers, the political parties themselves. And, of course, neither he nor anyone else has ever been able to rein in a bureaucracy that is so enduring and so maddeningly officious as to reduce grown men to tears.

New prime minister Shinzo Abe advertises himself as a reformer in the Koizumi mold, but even if he were on steroids it is unlikely that he could move all of the entrenched interests who want things to stay just as they are. After his predecessor’s six years of effort, for example, Japan is still remarkably closed to foreign direct investment and still one of the world’s most difficult markets for foreign manufacturers to penetrate successfully.

Perhaps the largest problem Abe-san faces is one that no political figure can solve. Like many of the developed nations of Europe, Japan is in a demographic death spiral, its population growing ever older and sucking up ever more resources in such areas as health care. As an added anchor on growth, many of the permanent jobs from which those golden-agers retired no longer exist, because many of the companies they worked for are finding it simpler and cheaper to do without permanent replacements. This explains the degree of desperation seen now among the younger generations, who more than ever before are finding employment only as part-timers, free-lancers and contract workers.

So the recovery of the world’s second-largest economy is not quite as advanced as it might appear to be at first glance. Problems still abound here, and solutions for many of them are either in short supply or, at this time, nonexistent.

Nevertheless, it would be sheer folly to write off Japan as a potent economic force in the decades to come. This is a country where bicyclists ride on hyper-crowded sidewalks without causing injury to pedestrians, and where your choice of pizza toppings includes mayonnaise. If the Japanese can handle all that, they can handle anything.