TOO MUCH FUSS is currently being made of the first growth in Japanese economic output in two years. Is this the end at last of 12 years of recession, which has seen the dynamic Japanese economy reduced to a water-logged hulk, apparently unsinkable but still totally unable to move forward?

The answer must be: “Don’t count on it.” In one way or another we have been here before, with brokers and bankers eagerly predicting that a marginal upturn in Japan’s growth does in fact represent the green shoots of a vigorous recovery. None of these predictions has proved to be more than wishful thinking. Anyone involved in Japaese financial service, especially foreign investment bankers who have made considerable committment to the Japanese markets in the last 20 years, is going to want to see some life and vigor, breathed back into its economy.

The bitter truth is however that nothing is changing because nothing fundamental has yet changed in the structure of Japanese business finance. There is still an unscalable mountain of non-perfoming bank and inter-company debt. If properly accounted for, these gaping balance sheet holes would render many banks and corporations insolvent. But they are not properly accounted for and the full extent of these debts, many of them run up in the insane property speculation of 15 years ago, is even now not yet clear.

Thus good money continues to be shovelled into the barely glowing economic boiler to keep the big economic names afloat, in the vague, and increasingly desperate hope that better times are finally just around the corner.

This insane concentration on painting and polishing the wreckage of the Japanese economy also has the disastrous effect of diverting both funds and management expertise away from the potentially vibrant small businesses. It is, in fact, these very companies who could lead Japan out of its economic mire.

Ironically these small businesses do not owe enough to be interesting to the financial markets, which are still busily pretending to count money that they in fact lost long ago. But backing small firms would mean abandoning the big debtors. And besides many foreign firms have trimmed their staffs, and have neither the management nor the appetite for yet more Japanese risk, unless it be the attractively priced treasury paper that government continues to pour out to investors.

What has fueled this latest upturn has been a reasonable first quarter export performance to the United States, despite a slowdown in the US itself. The weak yen undoubtedly boosted sales to the US but now the dollar is itself moving off its long-held highs, which means Japan’s US earnings have shrunk in real terms.

Perhaps the strongest test of Japan’s excitement at recovery, is what the international investment community thought of the official news, which had in fact been widely predicted. Unfortunately, the yawn that greeted the announcement was barely concealed. Until reforms, long promised by the government of Junichiro Koizumi, which are currently stymied, are pushed through, Japan does not have any hope of sustained recovery and there are many, inside and outside Japan, who do not believe that Koizumi’s plans go half far enough.

It really is time that Japan and all who wish her well, stopped kidding themselves. Everyone knows what is really wrong and what really has to be done. But so great are the problems and so many pivotal establishment players who are involved, no one has successfully figured out a place to start. Perhaps the best beginning would be to end the kiddology that surrounded these latest green shoot of recovery figures.

The first quarter economic growth stood at 1.4 percent. An analyst, who should have known better, pressed a couple of buttons on his calculator and announced breathlessly that this suggested an annualized rate of 5.7 percent. Some hope!