Japan's Not-So-Hot Recovery; The signs of strength in sales and investment are strong by Japanese historical standards, but pale in comparison with the United States.

Byline: Gail Fosler (Fosler is chief economist of the Conference Board, a global not-for-profit business-research group in New York.)

Financial markets and "reflation bulls" overstate the underlying strength in Japan's nascent recovery. Japan has clearly turned an important corner in terms of growth and stability, in contrast to the almost continual recession years of the 1990s. However, its actual rate of progress remains far more modest than the optimists would have you believe. For years now, the world has watched for

Japan to deliver the deep internal reforms required to jump-start its idling domestic market and transform it into a strong engine of global growth. Unfortunately, this moment has yet to arrive. Japan still relies on growth in the world economy, which means the world cannot yet rely on Japan.

Consider what is really happening in Japan's domestic economy. Employment and wages have risen for the first time since 1997, and on its own terms the economy appears much healthier. External factors, however, particularly export orders for industrial goods, still play a too-large role in determining productivity, profits and domestic investment plans--and, ultimately, employment and wage growth.

If we look back over the past 15 years, Japan's economy has tracked the U.S. and global cycle. It appeared to rebound on the back of the global recovery in the mid-1990s, only to be hit again by the 1997-98 Asian financial crisis. Then Japan regained its footing, only to retrench in the aftermath of the 2001 U.S. recession.

Today Japan is enjoying the aftereffects of an enormous "shot in the arm" provided by the surge in industrial-equipment exports to China in the 2002-04 period. Japan's export base increased at about a 20 percent annual rate between 2002 and 2004, with almost a quarter of this growth coming from China. At times during this period, Chinese imports were rising at about a 50 percent annual rate, while Japan's exports to China were rising at an almost 60 percent rate--the majority of these exports concentrated in the all-important industrial-equipment sector.

This is a thin base on which to build national economic recovery. The surge in Japanese exports in the past four years has had a huge impact on Japanese productivity and profitability. In the 2000-04 period, Japanese productivity was running at a near 5 percent annual rate, and ...