By Charles Scanlon BBC Tokyo correspondent

The Tokyo stock exchange opened for business 12 hours after the first airliner hit the north tower of the World Trade Centre. It was the first major market to test reaction to the terror attacks.

As shocked traders arrived at their desks in Tokyo, the world's leading financial centre was still shrouded by smoke and debris from the collapsed skyscraper.

Price deflation has made people reluctant to spend

Within minutes the Nikkei average had lost 6% of its value, falling below 10,000 for the first time in 17 years.

Recession fears

Investors feared that the already faltering US economy would be plunged into recession with devastating consequences for the rest of the world.

Japan was already in the midst of its worst recession since the World War II, and it had been counting on recovery in the United States to get its production lines rolling again.

The blow to confidence led to sharp cutbacks in capital spending, but the impact was short-lived.

The United States economy proved more resilient than many had expected, and Japanese exporters were quick to take advantage.

Within three months the Japanese economy was growing again, spurred by exports of cars and electronic goods to the United States.

Underlying problems

Despite the modest recovery, the underlying problems of the Japanese economy are causing as much concern today as they did before 11 September.

Indebted banks have cut back on lending

Japanese banks are still menaced by a vast weight of bad loans, the stock market is back again at 19 year lows, and falling prices are a persistent threat to long-term recovery.

The Prime Minister, Junichiro Koizumi, had been in office for just four months when the suicide pilots struck.

His approval rating was well over 80% because of his promise of fundamental reforms to revitalise the economy.

In the aftermath of September 11th he was distracted from the task.

His priority was to show solidarity with the United States and he committed much time and energy to the passage of controversial legislation to send naval vessels to the Indian Ocean - the first such deployment since 1945.

Reform plans shelved

Mr Koizumi's plans to clean up the financial system, to privatise state corporations and to challenge vested interests were shelved.

Koizumi was expected to press for economic reform

He never regained his early enthusiasm for reform and he is increasingly seen as a spent force.

Japan remains as dependent as ever on demand from the United States. If the US economy falters again, then Japan has little hope of maintaining its recovery.

The fall of the dollar against the yen in recent months is already threatening to choke off the surge in exports.

The Japanese consumer is in no mood to pick up the slack - continuing deflation, fears of job losses, and falling wages have seen to that.

After 12 years of stagnation, a return to dynamic growth looks more remote than ever.

Japan's experience provides a worrying lesson for the rest of the world - that a collapse in stock markets and other asset prices isn't always followed by recovery.