Only a decade ago, Americans were telling pollsters that they feared that the Japanese economic juggernaut would one day wipe out their jobs. But somewhere on the road to No. 1 status, Japan took a disastrous turn. After Japanese government bonds were downgraded to the bottom of the industrialized world, American writers started calling Japan "Asia's Italy."
Weak political leadership, weak control over government finances and huge corporate debts, problems that have plagued Italy, are modern Japan's main challenges as the rest of the world wonders whether the country, home of the second-largest economy in the world, will be a help or hindrance in confronting a global recession.
But all indicators point to Japan's ailing for several years to come. The Japanese government and the IMF forecast that Japan's economy will shrink this year and next. The fund forecasts that the economy will shrink next year by 1.3 percent, dragging global growth down to 2.4 percent.
Prime Minister Junichiro Koizumi has proposed sweeping reforms, from having banks write off billions of dollars in bad loans to letting weak companies fail, but is being stymied by traditionalists in his own party, the Liberal Democrats, who want to use his reformist image to perpetuate their own power. If Koizumi cannot right the economy, which has been slumping for a decade, there is no likely savior in the wings, economists say.
"The worst scenario is the most likely: that Koizumi stays in power for the next two years and accomplishes next to nothing," said Gerald Curtis, a visiting political science professor from Columbia University who has followed Japanese politics for over three decades.
The hole in Japan's government finances is easy to understand. Tax receipts this year will be 16 percent lower than they were in 1990, while this year's government expenditures will be 29 percent higher. After a decade of trying to spend its way out of recession and near-recession, Japan starts the new year with public debt at 130 percent of its gross domestic product, by far the highest among the major industrial nations.
Italy of asia
About 95 percent of this debt is held by Japanese investors at rock-bottom interest rates, and since late November, three ratings agencies, Fitch IBCA, Moody's and Standard & Poor's, have downgraded Japanese government debt ratings to AA, the level of Italy.
Giving little credence to government vows to control spending, Fitch forecast that Japan's indebtedness would exceed 150 percent of GDP by the end of next year and could approach 200 percent by 2007, barring strong intervention.
"Koizumi is very committed to reforms," Brian Coulton, a Fitch analyst, said. "But there is still an element of denial about how bad the problems are among the political community."
Koizumi's reputation as a reformer was badly dented toward the end of the year when the government ignored its own limits on public borrowing and enacted highway and medical spending bills that critics say are excessive.
But with no other reformer on the horizon, the Japanese cling to Koizumi. Almost 80 percent of the public approves of his job performance, according to recent polls.
Foreign investors are much less sanguine.
"Japan is a hopeless case," Jim O'Neill, a Goldman, Sachs strategist, said last month in London in a speech that reflected increasingly harsh foreign views of Japan's short-term prospects.
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