Japan's Ruthless Recovery.

Haruko Sakaida has dressed Japanese beauties for half a century, but these days the 75-year-old kimono maker frets that a critical accessory--her favorite brand of crisp white socks, called tabi--might soon vanish from the shelves. In June, she says, she was "shocked" to learn that the Meiji-era stocking manufacturer Fukusuke had filed for bankruptcy protection after 121 years in business--joining a long list of venerable firms to have failed recently in Japan. "It was explained to us that nothing is going to change and that the company will continue to make superior tabi," she says amid bolts of ornate cloth that fill her Tokyo shop. "To be honest, though, I'm worried."

Once famous Japanese brands are foundering like never before. Since the beginning of 2002, the casualty list has included Secaicho, maker of the Panther running shoes popular during the '64 Tokyo Olympics; Tsukuda, a toy wholesaler that turned products like Dakko-chan dolls and the Rubik's Cube into national sensations; Tohato, a confectionery famed for its caramel corn and raisin tarts, and Toh Toh Shu Honpo, a distillery established in 1690. While such failures evoke a sense of loss among tradition-minded Japanese consumers, they are more important for what they say about the hollowness of the nation's widely touted economic recovery.

A world desperate for economic health is eager to find signs that Japan is back, but the optimism is premature. Japan may be "the fastest- growing large economy in the world last quarter," as one Morgan Stanley currency analyst wrote last week, but that doesn't necessarily mean it is "on the mend." True, Japan has now enjoyed six straight quarters of growth, but the recovery story is based mainly on robust exports and a 30 percent bump at Tokyo's lowly Stock Exchange. It ignores persistent deflation (Japan's consumer price index slumped 0.4 percent in June, year on year), falling domestic consumption (supermarket sales shrank 5 percent in July) and vast overcapacity in virtually every industry.

The roll call of bankrupt companies is convincing proof of the deep disrepair in Japan's economy. Established businesses are failing at an unprecedented rate in Japan, according to new statistics from Teikoku Databank, which found that companies in business for more than 30 years now account for more than a quarter of all bankruptcies, up from just 5 percent in the late 1980s. Japan remains far more hostile to mergers and acquisitions than the United States or Europe, so there is no cycle of corporate death and rebirth. While Secaicho has folded its doors in Japan, a comparable American sneaker company, 80-year-old Converse, is being acquired by Nike for $305 million. "The collapse of time-honored companies," argues Kan Tsutagawa, economic news editor for the Yomiuri Shimbun, "is of symbolic significance to the gridlock facing the Japanese economic system as a whole."

The death rate for venerable Japanese brands is rising for a number of reasons: inability to follow trends, debt overhangs from the 1980s, competition from China and other emerging markets and, perhaps most important, the fact that most of them served a domestic market ravaged by years of recession. The bulk of the fallen elders were based outside major cities, and thus were vulnerable to anemic regional economies: Fukusuke was based in Sakai in western Japan, for example. None was large enough to fall in the infamous class of Japanese "zombie" companies: debt-laden major manufacturers or national retailers of the sort deemed "too big to fail" by creditors or the government.