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Recovery may be in sight but the bubble hangover lingers on

Kasumigaseki, the home of the Japanese bureaucracy, and Tokyo's equivalent of Whitehall, is an alarming place to work at the moment. Every day for the last fortnight, civil servants scurrying into the great ministries have been assailed by amplified slogans delivered from black vans by right- wing demagogues. The ultra-nationalists are furious at a government plan to bail out a group of bankrupt mortgage companies with as much as 1,200bn public money - last month, one of them became so irate he drove his van into the gate of the Ministry of Finance where it caught fire. On Friday, a group of ordinary citizens expressed their disgust by pelting the portals of the MoF with beans. In Kasumigaseki, the Year of the Rat has got off to a very rough start.

But after a run of bad publicity - from the Daiwa Bank bond losses to financial scams by senior bureaucrats - the men from the ministry appear finally to have some good news. Next week, in its monthly report on the economy, the Economic Planning Agency may make the announcement Japan has been awaiting since 1992: that, after four and a half years of near- zero growth, the economy has started to stir once again.

Whether or not the EPA uses the magic word "recovery", there apear to be good reasons for low-key optimism. The mighty yen, which last April was strangling export industry at a high of 79.75 to the dollar, is back under control - the dollar was trading last week at about 107. After an alarming plunge last summer the Nikkei Average is comfortably above 20,000, after a low of 14,295 in July. And recently published economic data suggest persuasively that the economy turned a corner at the end of last year, and that the hangover from the bursting of the late Eighties bubble is beginning to clear.

Industrial output rose for the third successive month in December, up a modestly cheering 0.8 per cent, after a 1.5 per cent rise in November. Housing starts in the same month were also up a fraction, and machinery orders rose 2.1 per cent. These good omens notwithstanding, there is a palpable reluctance among analysts and bureaucrats to finally utter the R-word. "The next couple of quarters will provide some real growth surprises," says Jesper Koll of JP Morgan, "but after that the risk of a brake on the economy is very high."

All responsible analyses echo this caution. In hangover terms the fear is this: that, despite purging itself of the excesses of the bubble, the poor old economy is still in a nauseous and vulnerable state, liable at any moment to come down with a stinking cold.

Those modest growth indicators are balanced by an alarming number of stubbornly negative factors, which suggest that ordinary Japanese are unlikely to feel the benefits of the putative recovery for a long time. Unemployment remains at a record 3.4 per cent but possibly twice as much again. The social stigma of claiming welfare and the disinclination of Japanese companies to sack workers, makes counting the unemployed a difficult task. Firms have dealt with the slump by freezing recruitment rather than imposing redundancies: among the 15-24 age bracket, unemployment is 6.1 per cent, and many of the jobless graduates generated by this policy are unregistered.

So it is a little suspicious to find that personal consumption is on a gentle upward incline.Pessimistic economists explain this by reference to the unprecedented series of national disasters that struck Japan last year. After the Kobe earthquake, and the Sarin nerve-gas attack on the Tokyo subway, the naturally cautious Japanese householder reacted by cutting his spending and saving his income. The lowering of this psychological barrier has produced the illusion of a consumer boom, which - the reasoning goes - will dissolve in the face of growing unemployment.

In a sense, the apparent upturn should come as no surprise. Last August, a 73,000bn public spending programme was unveiled by the government, criticised at the time as an unimaginative response to the crisis of stagnation. Given its scale what is perhaps most striking about the glimmerings of recovery is how faint they have been. The government's huge payout has contributed to a budget deficit expected to amount to 6.2 per cent of GDP this year. Even if there were ready funds for another public spending spree, the public is in no mood for further squandering of its tax cash.

When last year's dose of fiscal Paracetamol wears off,the recessionary headache may throb as painfully as ever.