Trying to read Japanese signs: Terry McCarthy in Tokyo finds a mass of conflicting information about the state of the country's economy

To someone returning to Japan after a month on the high seas, the state of the nation's economy is, to say the least, confusing. Underneath a cat's cradle of conflicting data a number of fundamental shifts are taking place. Picking out those shifts is not easy.

The annual company reports season has just ended and judging from them, the country is floating on a lake of red ink. Profits (if there were any) were down from last year, and losses abounded: Nissan managed an impressive dollars 1.9bn (pounds 1.2bn) pre-tax loss and predicted further losses for the coming year. But at the same time the stock market is trading at its highest levels for two years - as if the country were embarking on rapid expansion.

The Organisation for Economic Co-operation and Development this month raised its forecast for GDP growth in Japan from 0.5 per cent to 0.8 per cent. The next day, Japan's Economic Planning Agency announced the economy was 'stagnant overall, but showing some bright spots' - with the kind of forced optimism weather forecasters inject into bulletins on the eve of a wet bank holiday.

But as one ponders how long it will take Japan to recover from its recession, the next confusing question arises - what recession? With unemployment at 2.8 per cent, a trade surplus ticking along at over dollars 130bn a year, and the average worker having had to make only marginal changes to compensate for the loss of overtime earnings over the past couple of years, it is hard to find in Japan those deep scars that recession has left in Europe and the US.

The Nikkei Stock Average, which closed last Friday at 21,503, is 23 per cent up on the year and at its highest value since March 1992.

In the past weeks, turnover on the Tokyo Exchange has often been twice, sometimes nearly three times, as high as the average for the past couple of years. And yet the price/earnings ratio for the entire market is about 70: more than twice the rate at which red lights would begin flashing on other exchanges. And only the bravest of economists are predicting a general increase in corporate profits for the current year.

The beginning of Tokyo's rally this year came from foreign buyers, who have already purchased about dollars 40bn in Japanese stocks. Spotting a shift in the pattern of Japan's economy, foreign investors piled into smaller stocks: companies that were more flexible, less weighed down with excess staff and more able to adapt to new consumer demands than the giant corporations with high overheads.

The 2.8 per cent unemployment rate still masks enormous overstaffing throughout the economy: were it not for the powerful 'administrative guidance' against wide-scale redundancies, Japan would have an unemployment rate comparable with the US.

Last month Japanese institutions suddenly began to regain interest in stocks, and a type of feeding frenzy began. Some analysts are now predicting the Nikkei will hit 24,000 by the end of the year. This would come as an enormous relief, both to the government which is desperately seeking good economic news to bolster its image, and to the banks, whose capital adequacy ratings rely on the value of their stock portfolios.

But for every optimist at the moment there is a pessimist sitting in a neighbouring office predicting another fall back towards the 16,000 range, similar to the brief rally and subsequent tumble last autumn. The market is running with recently released economic indicators that seemed to promise an overall pickup - but there is nearly as much bad news floating around as good, and it will not take much to tilt the balance away from this burst of optimism.

Much of the evidence for the so-called recovery is anecdotal: a brisk sale of 48 luxury condominiums for between pounds 1m and pounds 3m each in a new tower block in central Tokyo was jumped on by many as heralding the end of the property slump.

More sober bankers, who still carry billions of yen in non-performing loans which were secured on property values of the late 1980s, have yet to see light at the end of the tunnel. Newspapers report that nightclubs are filling up, that parcel delivery services are increasing, that the sales of personal computers are shooting up, that consumers want to buy again, after several years of saving and paying off debts.

But again the picture is confusing. Department stores continue to report declining sales even though last year real consumer spending rose by 1.1 per cent. The Japanese consumer has not only discovered discount shopping, but is sticking with it. Those who thought the discount stores in shabby parts of Tokyo with goods sold direct from their boxes were a passing fad are thinking again.

It appears Japanese consumers have cottoned on to the outrageous margins they have been charged by traditional distribution and retailing networks, and no longer has any qualms about shopping for bargains. The inefficient, cartel-like distribution set-ups which guaranteed high prices and helped keep foreign goods out are being circumvented by a new generation of discount retailers.

In theory, this should be good news for foreign companies trying to sell in Japan. Along with the appreciation of the yen, which makes imports automatically cheaper in Japan, the retail revolution bodes well for those companies fleet enough of foot. The finance ministry last week released figures showing that Japan's trade surplus fell 16 per cent in May, with imports increasing by 12 per cent, compared with a 4 per cent increase in exports.

But even here all is not as it seems. The trade surplus with the US actually increased in May, by 7.5 per cent, but the surplus with Asia declined. According to Baring Securities, those goods accounting for the surge in imports are mostly food items and manufactured goods: consumer electronics, cars, precision machinery and office equipmement. These are mainly made by Japanese companies who have relocated factories to the cheaper labour markets of South-east Asia, and are exporting back to Japan.

So what is at first sight a drop in the trade surplus and an increasing penetration of the Japanese market by foreign producers turns out, at least in part, to be a new way Japanese companies have found to sell to consumers. Confusing indeed.

(Photograph omitted)