End of Japan's Recession Is Seen but Not Yet Felt

LIKE a glassy spot on a flat road, a full-fledged recovery of the Japanese economy hovers in the offing, tantalizingly in sight, but never quite within reach.

So analysts and economists here have become content with terms describing a near recovery. Some say the recession that began in May 1991 is still ``bottoming out.'' Others talk about economic ``rehabilitation'' or ``moderate expansion.''

``Compared with recessions in the past, this recovery seems to be very slow. That is the dominant characteristic,'' says Sakae Murakami, director of the Wako Research Institute of Economics in Tokyo.

There are some encouraging statistics. Japan's gross domestic product (GDP) - the value of the country's goods and services, excluding income from abroad - grew by 0.9 percent in the July to September quarter. Japan's economy contracted by 0.2 percent in the 1993 fiscal year (FY), ending March 31. But the government's Economic Planning Agency is holding to its prediction that GDP will grow by 2.4 percent this fiscal year.

Earlier this month, researchers reported that corporate profits at the biggest Japanese companies edged into the black during the first half of FY 1994 for the first time in 4 1/2 years. But Mr. Murakami points out that sales declined during the same period, indicating that the profit turnaround was largely due to cost-cutting.

There is also a powerful sense that the recession has gone on long enough, so, therefore, it should end. For most of 1994, key economic officials - such as outgoing Bank of Japan Governor Yasushi Mieno - have been beating a drum of anticipation about an imminent recovery, repeatedly sighting various ``bright signs,'' such as a boom in home construction earlier this year.

Gradually many private analysts joined the recovery bandwagon, and a consensus of sorts emerged this fall. On the optimistic side is investment bank Merrill Lynch & Co., whose Tokyo branch forecasts a 3 percent growth in GDP in FY 1995.

Investment houses such as Goldman Sachs are more conservative. Senior economist Mamoru Yamazaki predicts 1.6 percent GDP growth for 1995. Economic debate in Tokyo these days generally concerns the pace of recovery and what might slow it, rather than whether or not the economy is turning around.

Merrill Lynch economist Ron Bevacqua says he thinks that a burst of capital investment from businesses (on high-cost items, such as new office space, factories, and machinery) will drive a more robust recovery. Not all economists share his enthusiasm about business investment. But many are optimistic about the potential for increasing amounts of private consumption - people buying things they need or even things they want.

This summer was unusually warm in Japan, so sales of air conditioners, soft drinks, and other cooling-related items were high. In the Wako Institute's survey of corporate performance from April through September, electric and electronic manufacturers outpaced other sectors, showing almost a 78 percent boost in profits over the same period last year. The average increase in profits, by contrast, was 2.3 percent. Consumption tapered off as the weather cooled, but many economists say consumer spending will stay solid. ``I have no doubt that sales are going to recover,'' Mr. Bevacqua says.

The government has also been stimulating the economy with public investment and tax cuts, and economists think that additional government action in '95 will help the recovery.

And the Japanese are hopeful about being lifted by the ongoing recoveries of other developed economies, such as the US.

So if consumption is rising, the government is encouraging the economy, and people overseas are still buying Japanese goods, what can possibly go wrong?

The major problem has been around for a while: the bubble. In the late 1980s, Japan saw a frenetic period of business and personal investment amid a boom of easy lending. The ``bubble economy,'' as it has been known ever since, left businesses with lots of capacity (such as inventory and facilities) and banks with huge amounts of bad debt.

Both legacies have been diminished with time, but they remain drags on the recovery. Goldman, Sachs's Mr. Yamazaki - in an instance of the debates taking place on what will or won't help an economic expansion - says that excess capacity will stifle any major increase in business investment.

The situation for Japan's financial sector is still acute, making institutions less likely to take risks in funding new enterprises. The Japanese securities industry is in especially bad shape as the Tokyo Stock Exchange loses more and more business.

Japanese are also worried about competition from vigorous economies elsewhere in Asia, and by the ongoing flight of Japanese companies for cheaper production sites abroad.