Despite the market-pleasing mantra of reform that wafts from the cabinet office of Prime Minister Koizumi, some experts doubt whether Japan Inc has really changed its ways. While there has been a recent rise in sales of household digital products, deflation is still eating away at prices and assets, most consumers are taking home smaller pay packets, and there is more hardship to come, says Nikko Salomon, Smith Barney’s Mr Murashima: “Tax on social security and pensions will be hiked this year and tax burdens on pensioners will be raised next year. “The government’s whole economic strategy depends heavily on this very narrow approach, which now seems to be losing steam,” one analyst said.Most commentators say Japan will struggle to achieve long-term economic recovery until it manages to coax consumers to open their wallets. The widening gap between successful and less successful firms in each industrial sector is one of the distinct features of the current recovery, according to Akira Kojima, the managing editor of Japan’s business daily, the Nihon Keizai Shimbun.Moreover, the billions thrown at the currency markets have not stopped the yen from appreciating to its highest level in four years, making Japanese exports more expensive, imports cheaper and stoking deflation, which is now in its fifth year. Instead of turning to their traditional subcontractors, Toyota, Hitachi and the rest of the giants are increasingly looking for bargains overseas, meaning disaster for thousands of smaller firms and the millions of people who depend on them.It is hardly surprising then that most of the optimistic notes about the economy are being sounded by corporate heavyweights such as the NEC chairman Hajime Sasaki, who believes that the economy has “finally turned the corner.” The latest Tankan business sentiment survey, however, finds midsize corporate Japan, particularly non-manufacturers, as pessimistic as ever. He suggests that Japan offers the best return for private equity investors this year as funding costs decline, adding: “Financing here is cheap and is getting more available.”But the pessimists say that while the government carefully tends to its large showcase exporters, Japan’s much larger army of small manufacturers is being neglected, thanks to the breakdown of what Mr Hama calls the “trickle-down relationship” between parent and subcontractor, one of the key factors behind Japan’s post-war miracle. There is no doubt about this recovery, but there is a lot of doubt about how widely this has spread among the rest of the economy.

My view is that the recovery is still limited and that its spillover to the household sector is frustratingly slow.”One person who believes in the Japanese economy is Guy Hands, the UK financier who arranged $20bn of takeovers as the head of Nomura Holdings Inc.’s principal finance group. It is an approach that is certainly boosting some of Japan’s economic targets, says Kiichi Murashima, the director of economic and market analysis at Nikko Salomon Smith Barney in Tokyo: “We’re basically seeing an export-led recovery based on manufacturing, and this has sent up corporate spending, especially in the manufacturing sector. Tokyo’s aim is to shore up exports – particularly by large manufacturers – to the US and China (which accounted for about 80 per cent of this export growth last year, according to Merrill Lynch), by preventing the yen from rising against the dollar. in a commentary this week: “Now is as good a time as any to step back from the most aggressive effort to steer the currency markets in modern history.”The controversy over the dollar-buying spree may be new but the strategy is certainly not.

Recent reports indicate the intervention has ended, and not before time said Bloomberg economist William Pesek Jnr. Japan’s currency reserves last month grew $35.61bn for the sixth consecutive month of increase, and the country now sits on a record $776.86bn, easily the largest reserve in the world and enough to earn a rare rebuke this month from the US Federal Reserve Board chairman Alan Greenspan. Even this is not enough to guarantee a key Koizumi pledge to cap annual bond sales at ¥30 trillion; more than ¥36 trillion worth of new bonds are up for sale this year.But government help comes in all shapes and sizes, and the sheer extent of Tokyo’s intervention in the currency markets has raised eyebrows everywhere. However, the pessimists have lined up to pour cold water on these predictions.