The recovery had been coming, in fits and starts, over the previous 18 months, but as 2006 gets into its swing, the optimism in business, finance and government circles is tangible.

 

It has even brushed aside the 10 days of uncertainty in the middle of January brought about by what was quickly dubbed "Livedoor shock," the inquiry into the Internet company set up by young entrepreneur Takafumi Horie.

  

The Tokyo Stock Exchange plunged around 900 points in a couple of days when financial authorities raided a company that was seen by some as a model for Japan's business future. Horie remains in custody on fraud charges - but the TSE has recovered all its losses and the blip is over.

  

Japan was an economic juggernaut in the 1970s and '80s; the second half of this decade may well see it return to those heights.

  

"The biggest change that we can see in the last 12 months - and even more so in the last couple of months - is that the Japanese people again have faith in the national economy," said Takuji Aida, chief economist with Barclays Capital in Tokyo.

 

"People are out there buying things, it has been a good winter bonus season for employees with some of the biggest payments for 10 years and December sales figures are forecast to be very good.”

  

Positive signs

 

The list of positive trends that have helped fuel the optimism is an impressive one.

 

The combined net profit of 129 Japanese banks in the first half of the fiscal year came to a total of Y2,124.2 ($17.9) billion, up more than five-fold on the same six-month period a year earlier.

 

The list of positive trends is
impressive

 The Japanese Bankers' Association linked the profits to a decrease in charges required to dispose of bad loans.

 

"The Japanese know that the country is moving out of the deflationary spiral that has afflicted the country and we are going to see asset inflation this year," Aida said.

 

"Already we are seeing land prices going up, banks' lending increasing, despite some technical factors, and people are ready to take on an increased tax burden because they see the employment situation improving.

  

Earlier in December, the government's closely watched Tankan survey showed that Japanese manufacturers remained positive in the final quarter of the calendar year for the third consecutive quarter, reflecting improved earnings results and stock prices climbing.

 

Another positive was a slight - but significant - rise in the consumer price index, which inched up 0.1% in November for the first increase in 25 months. Economists have welcomed the reverse as a sign that the deflationary dragon has finally been put to the sword.

  

Upward trend

 

In addition, industrial production was up 1.4% in November - the first time in three years that it has risen for four straight months - and allowed the Ministry of Economy, Trade and Industry to suggest cautiously that industrial production "is on a moderately upward trend."

  

Similarly, a record 302 Japanese companies had their credit ratings upgraded in 2005, again largely due to the completion of writing off bad loans, and the Tokyo Stock Exchange approached the end of the year hovering around a healthy 16,190.

 

 Even the Organisation for Economic Cooperation and Development (OECD) recognised how far Japan has come in a relatively short space of time, revising its prediction of 1.5% growth for 2005 to 2.4% in 2006 and 2% in 2007, up from 1.7 percent.

  

"The expansion is led by private domestic demand, underpinned by strong corporate profits and a reversal of the declining trend in employment and wages"

OECD report

In a report, the OECD said, "The expansion is led by private domestic demand, underpinned by strong corporate profits and a reversal of the declining trend in employment and wages." It warned, however, that the Bank of Japan needs to manage the rebound carefully, including by sticking to its long-held policy of quantitative easing, until inflation is sufficiently strong to make any return to deflation impossible.

  

Koizumi’s chess move

 

But all the positive facts and figures perhaps gloss over the hard work that Prime Minister Junichiro Koizumi and his administration have had to put in.

 

Facing a rebellion from the "old guard" within his Liberal Democratic Party over plans to privatise the postal service and broader plans for structural reform of the economy, Koizumi called a general election in September.

 

Koizumi was given an overwhelming mandate from the public to continue reforms that have been instrumental in the recovery. His confidence in his own abilities has rubbed off on the public and, as the year comes to an end, they are looking to the future rather than living in fear of more economic misery.

  

The economists also appear to have stopped worrying about where Japan was headed and are now forecasting a far rosier immediate future.

  

"By the time of the Beijing Olympics (2008), I expect the Nikkei to be at 25,000 and if the economy grows 2.5% then average earnings growth could be as high as 17%," said Jesper Koll, chief economist with the Japan unit of Merrill Lynch.

 

Pacific powerhouse

 

Koizumi was given an
overwhelming mandate

 "Every year for the past 10 years Japan has taken a couple of steps in the right direction, with accounting reforms, tax and legal changes, improvements in corporate governance. All that has converged to put Japan in a 'sweet spot' today where both aggregate demand and supply are shifting out at the same time, prices are stable and output is steadily growing.

  

"Why am I so optimistic? Because the government is becoming small, public investment has been cut from 8% of GDP to 4.5% and the 'zaito' extra budget has been cut from Y60 trillion to Y16 trillion," he said.

  

Koll dismissed suggestions in some quarters, most recently the chairman of the Japan Business Federation, that the country might be inflating another bubble that could again burst.

 

"After years of stagnation marked by relatively short growth spurts, we think that Japan's macro- and micro economy is finally ready to fulfil its longer-term high growth potential. In our view, Japan is emerging into a reliable Pacific powerhouse."