The Sun Also Rises

In recent months, American businesses have focused their attention on China, which is becoming increasingly competitive with U.S. firms. Several U.S. business associations are filing anti-China trade complaints in Washington, charging that Beijing keeps its currency pegged to the dollar at a low rate to export more cheaply.

But even as they focus on Beijing, Americans appear to be ignoring the fact that Japan, the world's second-largest economy, is recovering from a decade of economic malaise. Lately, Japan's economy has posted impressive figures, and a recent Bank of Japan survey showed business confidence rose in Japan last August and September, the first time confidence has gone up in more than three years. The reason: Japan's economy grew by nearly 4 percent in the second quarter of 2003, while Japanese exports grew by nearly 10 percent year-on-year in September.

Japan's nascent revival can be attributed to several factors. First, Prime Minister Junichiro Koizumi and his cabinet have begun to push sclerotic Japanese companies to reform and become globally competitive again; the Koizumi government has launched programs to downsize and reform businesses. "Koizumi has changed the mood of the country toward more reform," says William Breer, Japan chair at the Center for Strategic and International Studies, a Washington, DC, think tank. Responding to Koizumi, as well as to pressure from China and other developing nations, many Japanese companies have begun downsizing and outsourcing in cheaper locations. With the money they've saved, businesses are able to invest in R&D, producing better goods more cheaply. Consequently, Japanese consumer spending is recovering: Spending by Japanese workers rose nearly 0.5 percent between June 2002 and June 2003.

Japan's recovery holds promise for American business. Strong economic growth is pushing the Japanese yen up-Merrill Lynch estimates it will rise by 12 percent against the dollar between fall 2003 and summer 2004. A stronger yen would be good for American manufacturers, particularly small companies that make computer and electronics parts, whose exports would be cheaper by comparison with Japan, says Toshio Nishi, a research fellow at the Hoover Institution on War, Revolution, and Peace at Stanford University.

What's more, Nishi says, if Japan recovers, "the whole world will benefit." Japanese consumers will increase their consumption of American agricultural goods-American soybeans go primarily to Japan and China, for example-while Japanese companies, flush enough to spend more on capital equipment, will buy machinery from the United States.

Still, many experts are not convinced the island nation will sustain its recovery. Japan has entered short-term recoveries before in the decade since its economic bubble burst but has never maintained its growth. And the country continues to face a mountain of public debt, persistent deflation and, despite Koizumi, a political system that rarely changes. "I've heard for the past 12 years the same story about Japan's economy recovering," says Nishi. "I remain very skeptical."