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There are many ways to measure how important the car maker Toyota is to the Japanese economy, and how hard its lost year has hit both the country as a whole and this once-booming city that bears its name.

You could look at Japan's plummeting export numbers - with automobile sales leading the way down - and the sagging gross domestic product figures that have resulted. You could spend an afternoon in the Hello Work job centre in Toyota City, which once helped recruit workers from as far away as Brazil for the company's bustling assembly lines but which is now a quietly desperate place with five applicants for every available job.

Or you could drop by Machiko Sakakibara's hair salon just a few minutes' walk from Toyota Motor Corp.'s gleaming corporate headquarters here. A few years ago, she and her husband's scissors were flying in an effort to keep up with the steady stream of clients from both Toyota and its supplier companies who strolled over to keep their hair short, neat and professional.

But on a recent Friday afternoon, during what should have been her busiest hours of the week, Ms. Sakakibara stood alone in her gaily decorated salon with not a customer in sight. Instead of the regular seven or eight customers a day, she and her husband often now serve just two or three.

"Because of the recession, people who used to come in every month now come in only every 50 days. It just means more work for me when they do come," the sprightly 65-year-old said with a grandmotherly giggle. "People have also cut back on eating out, and drinking."

The pinch is being felt all across Japan, one of the world's richest countries.

The island nation finds itself in the grip of its worst economic downturn on record. In releasing another gloomy report this week, the Bank of Japan tried to put a silver lining on things by highlighting that the economy - which it forecast would contract by 3.4 per cent in the year ending next March - had "stopped worsening."

Talk of a recovery, at Toyota and in the wider Japanese economy, is usually cast into the future, 2010 at the earliest. Some expect that it will take far longer.

In a country only recently recovered from its "lost decade" of the 1990s, the prospect of another prolonged and painful economic downturn is a dismal one. Japan is expected to be slower pulling out of its recession than other advanced economies. The slump has devastated Japan's export sectors, driven by powerhouses such as Toyota and its rival auto makers, and the electronics giants like Sony.

Exports account for just 15 per cent of Japan's economic output, but the work is high-value, and ripples through the economy. Domestic demand, which fuels a huge service sector, is also hurting badly.

Nowhere is the manufacturing slump - and its impact on the wider economy - more visible and visceral than in Toyota City.

Toyota directly accounts for billions of dollars in annual sales and tens of thousands of Japanese jobs. If you include the hundreds of companies across the country that supply it - 400 of them in the Toyota City region alone - the company's importance multiplies.

Even General Motors doesn't mean as much to the U.S. economy as Toyota does to Japan's. Sales at department stores in the nearby city of Nagoya have fallen almost in lockstep with Toyota's fortunes.

In Toyota City, 80 per cent of the 410,000 residents owe their livelihoods to Toyota. By the start of this year, as the number of job seekers here leapt 130 per cent from January, 2008, the city had won unwanted fame as Japan's most out-of-work town.

The Sakakibaras' hair salon is still doing better business than many in Toyota City. Across the street from their still-swirling barber pole, a row of grey metal shutters covers what used to be a thriving little commercial district consisting of a convenience store, vegetable market and small clothing retailer.

"If Toyota catches a cold, everybody gets pneumonia," Ms. Sakakibara explained.

Suddenly, this city that once aspired to be the next Detroit is worried that it will become exactly that.

Political paralysis

Toyota's pain is felt far beyond Toyota City.

The credit crisis in the faraway United States all but wiped out a key market for Toyota's cars. The world's largest automobile company was forced to cut production, reduce shifts and let 9,000 temporary workers go as their contracts expired.

It was a downsizing felt right across a nation.

"The auto industry's weight in our economy is four times more than in the case of the U.S. While U.S. auto makers have outsourced very much, Japan's auto makers have kept a pyramid of [domestic]contractors," said Akira Kojima, a senior fellow at the Japan Centre for Economic Research. "The short-term impact [of the downturn]is very, very significant."

Toyota and the other giants of the Japanese automobile industry have led the way down as Japan has slid deep into recession over the past 12 months. Honda Motor Co. Ltd. and Nissan Motor Co. Ltd. are also mired in deep slumps as exports of Japanese cars to the U.S. continue to plummet, falling 54.8 per cent from May, 2008.

Over all, Japan's economy shrank by a record 3.8 per cent in the first quarter of 2009 compared with the previous quarter, or a staggering 14.2 per cent year over year. Unemployment, meanwhile, rose to a five-year-high of 5.2 per cent, a number kept artificially low by the hundreds of thousands of Japanese who have simply given up looking for work.

The bad news keeps piling on. Every week seems to bring a new raft of ominous reports and statistics detailing the depths of the country's worst recession since 1945.

This week, the International Monetary Fund forecast that Japan's gross domestic product would shrink by a record 6.0 per cent this year and said that deflation - now at 1.1 per cent - would linger through 2011. To put that in perspective, anything in the range of a 6.0-per-cent contraction would wipe out all the growth of the past five years. Put another way, it would be roughly equivalent to a third of Canada's gross national product disappearing.

The IMF said that the outlook for Japan's export-dependent economy remained "exceptionally uncertain" and said the government of Prime Minister Taro Aso should prepare to expand on the $260-billion (U.S.) stimulus package it has already rolled out.

"In terms of the economic cycle, we're still on the downtrend. We hit the big bottom, but the bottom is unprecedented. There has been some recovery, but we're still below the surface of the seawater, so it's still difficult to breathe," said Mr. Kojima of the Japan Centre for Economic Research.

"The [full]recovery will not come quickly. It's not a U-shape recovery. There may be a second dip."

Optimism is indeed sparse here, even among politicians gearing up for a general election now just weeks away.

"It seems that in 2010 as the U.S. economy recovers, so too will the global economy recover," Foreign Minister Hirofumi Nakasone said in an interview with The Globe and Mail at his Tokyo office. "However, unlike recovery from former global recessions, there is a possibility that the United States may not be the driving force for the recovery and the speed of recovery will be moderate all over the world."

But while Mr. Aso's government did manage to pass the stimulus package in April, his cabinet's deep unpopularity has left the country all but leaderless during the year-long economic crisis as calls for more government intervention have mounted. This week, Mr. Aso accepted the inevitable and called a general election for Aug. 30, in which his ruling Liberal Democratic Party is expected to fare abysmally. If the LDP loses, it will end its nearly five-decade grip on power.

Ken Courtis, the Tokyo-based former vice-chairman of Goldman Sachs, said the political paralysis has prevented Japan from making the dramatic overhaul of its still export-oriented economy that it direly needs. The country, he said, needs to undertake massive privatization and deregulation schemes that can stimulate its moribund domestic economy in order to make up for the collapse in exports.

"Japan is in a profound crisis. It's a crisis for which the Japanese require strong political leadership to make big decisions on political reforms," Mr. Courtis said.

While many economists argue that Japan was hit so hard by the global economic crisis because of its reliance on exports, overseas sales actually make up a far smaller share of Japan's economy than in neighbours like China, South Korea and Taiwan.

Exports, predominantly automobiles and consumer electronics, account for only 15 per cent of Japan's GDP, compared with 33 per cent in China, 40 per cent in South Korea and 65 per cent in Taiwan. The export-oriented sectors of Japan's economy, while hurting badly at the moment, are considered globally competitive and are expected to bounce back when global trade does.

The more fundamental problem is the other 85 per cent - the domestic economy, specifically the service industry - which is seen as overprotected, overregulated and badly underdeveloped. Declining domestic demand has actually played a bigger role in Japan's downturn than the drop in export sales. Even Toyota loses money - and has for some time - in the Japanese market.

Few, however, expect that a victory by the opposition Democratic Party of Japan - seen as replacing one group of political elite with another - will lead to the desperately needed overhaul. "A DPJ government will not change Japan's macro fundamentals in the short run," reads a report released this month by the Tokyo office of Morgan Stanley. "Growth will still stagnate, deflation continue and deficits rise."

All eyes on Toyoda

Beyond the economic pain and political wrangling, there's a real feeling of shock here. After decades of steady profits, no one seemed to believe that things could ever turn this bad for the country - particularly for Toyota and Toyota City.

All eyes are now on the company's newly appointed president, Akio Toyoda. Mr. Toyoda, the 53-year-old grandson of founder Sakichi Toyoda, replaced Katsuake Watanabe shortly after the ink started flowing red on the company's balance sheets.

The company's $4.4-billion (U.S.) loss for the fiscal year that ended March 31 was its worst ever, and despite slashing production from 7.5 million vehicles to 6.5 million, the company is forecasting an even bigger deficit this year.

In his first press conference since taking the job, Mr. Toyoda painted the company as having overextended itself in an effort to make big cars and big profits in the American market. He promised to take a 30-per-cent pay cut himself, and offered a back-to-basics strategy that would see the company develop new and separate strategies for each of the regions it is targeting: North America, Europe and Japan, as well as emerging markets like China and India.

Instead of offering a full range of Toyota products in each market, the company will aim to sell American-style cars in the U.S., Japanese cars to the Japanese and in all regions return to promoting the cheap, reliable cars through which the company made its name.

And there is already a silver lining to all the dark news. The latest model of the hybrid electric Prius model is selling so fast - sales in June jumped 258 per cent from the previous year - that the company announced last month it would boost production at the two plants near Nagoya where the car is built.

Nonetheless, Mr. Toyoda was only optimistic in the longer term: "It will be sailing amid troubled waters for me and the new management team," he told the press conference. "The tough conditions may continue for two years."

Poised for reinvention

The good news about the Prius has become legend in this land, and repeated as gospel prophesying better times by everyone from economists in Tokyo to city hall staff and unemployed workers here in Toyota City. The company will bounce back, everyone whispers to each other.

A tidy city where nearly every business - even those that have nothing to do with the automobile industry - has the word "Toyota" in its name, Toyota City's fastidious exterior could change rapidly if the company's fortunes don't recover. Corporate income tax collection was off by more than 96 per cent last year as not just Toyota but all the business reliant on it posted untaxable losses. As a result, the construction of a new municipal building was put on indefinite hold. So too was all scheduled maintenance work on the city's roads, parks and other property. "This is the first time we have ever experienced this as a community," said Toru Niimi, an official in the international relations department of city hall.

Born here 37 years ago, Mr. Niimi said there had been an understanding among residents that times might not always be so good for Toyota, but that after 45 consecutive years of profits, people were still stunned by the downturn. "For it to hit so drastically and deeply this year and last, that's what people didn't expect."

At the Hello Work employment centre, manager Masami Kawajiri is doubling these days as a receptionist in order to keep up with the surge in job seekers. Most are young and middle-aged workers who came to Toyota City to take up temporary jobs that disappeared when the company slashed its work force.

Many are Japanese who moved to Toyota City years ago when the good times looked like they'd continue indefinitely. Thousands are Brazilians of Japanese descent who came here under a special program to fill a labour shortage in the booming 1990s.

For now, many remain in the city, straining its declining resources. Many say they're hoping for jobs on the Prius assembly line when it inevitably expands to keep up with booming demand.

"In the past, there have been up and down times, but you could always see what's ahead. This time, no one knows what's happening," Mr. Kawajiri said during a short break from answering phones and dealing with the steady stream of walk-ins at Hello Work.

Toyota and Japan have been here before. As war broke out in East Asia in the late 1930s Toyota transformed itself from the Toyoda Automatic Loom Works, and the production of weaving machines, into an auto maker to help fill the country's wartime needs. In the aftermath of the Second World War, Japan as a whole reinvented itself as a global manufacturing and research and development hub.

Toyota hopes the Prius will be the beginning of its next reinvention. The hybrid carries not only the hopes of Toyota and the city around it, but those of the wider Japanese economy as well.

"We can say that if Toyota fails, then the Japanese economy will surely fail," automobile industry analyst Masaaki Sato said recently. "If Toyota can properly do its job, then the economy can recover."

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