Japan's Phoenix Economy

TEN YEARS TO RECOVERY

A half-century ago, Japan picked itself up from the ashes of war and, within a few years, stunned the world with its economic achievements. In all likelihood, it will do the same again. True, some analysts see muddling through and stagnation as Japan's future. Others even fear the financial system is headed for outright meltdown. But the most likely outcome is that Japan will reform and revive. And if it does so, bringing its host of inefficient sectors up to world benchmarks, it can achieve sustained growth of three percent a year, perhaps more.

Japan has already frittered away one decade, skeptics retort. Why should the next one be any different? Because no society puts itself through wrenching transformation until it has exhausted all other alternatives. And for years many of the best and brightest economists claimed that such alternatives existed: just spend more or print more money. As recently as the brief upturn of 1999-2000, many claimed these nostrums were already working; Japan's politicians and people preferred these consoling illusions. Only now have events persuaded the Japanese people that without reform the situation can only get worse. This new awareness was the force behind Prime Minister Junichiro Koizumi's election in 2001. The first step in solving a problem is admitting you have one.

Japan does not have the feel of a failed state. On the contrary, this is still the same nation that created the economic miracle of the 1950s and 1960s. The problem is that the institutions and practices forged to create that miracle still rule Japan -- and those obsolete institutions have turned into a political and economic straitjacket. Nonetheless, Japan abounds with bright, ambitious businesspeople, academics, and even bureaucrats who yearn to break out of those bindings. They are capable of leading the new Japan. What they lack is a clear economic program, critical mass, and an institution around which to coalesce. The good news is that with time, those too will come. The bad news is that it will probably take ten more years to reach this promised land. And the road from here to there will be very bumpy.