On the face of it, Japan's economy appears headed for a full-fledged recovery. In the first quarter of 2005, the gross domestic product (GDP) grew 1.3 percent from the previous quarter, or 5.3 percent in annualized terms, according to the Cabinet Office. It was the first solid quarterly growth since the 1.4-percent rise a year earlier. As a result, the GDP growth rate for fiscal 2004 reached 1.9 percent for the third consecutive year-on-year gain.

Optimism is hardly warranted, though. A closer look at GDP components, as well as microeconomic conditions, reveals an economy still smarting from the aftereffects of prolonged stagnation. There are not yet reassuring signs of self-sustaining growth led by domestic demand. Key engines for growth -- consumer spending, exports, capital investment -- all lack long-term power.

Prospects for corporate earnings are becoming cloudy again. Although tallies of earnings reports published so far make it likely that large companies' pretax profits will chalk up all-time records for the year ended March 31, 2005, exceeding the gains made in each of the previous two years, profit forecasts for the current business year ending in March 2006 are marked by caution, with many firms predicting declines.