Courtesy Reuters

Japan: A Setting Sun?

DEATH IN MIDSUMMER

Two years ago, with an economy mired in recession and reeling from a full-blown financial crisis, Japan's elites realized that something had to give. They embraced a complete overhaul of the country's banking system and acknowledged the need for structural reform of the economy as a whole. Reform peaked in 1998, when Tokyo moved to rescue the financial system from imminent collapse, cut regulations, and revitalize industry.

Today Japan's recovery hangs in the balance. Just when the momentum for reform appeared unstoppable, the government's revival strategy began to lean too heavily on fiscal stimuli, pushing Japan into a spending rut. Economic growth will halt if Tokyo ignores the pressing need for reform. The government is backpedaling because the sense of urgency generated by the banking crisis has eased, because the economy is showing some signs of recovery, and because the upcoming general election is looming large in the minds of ruling Liberal Democratic Party (LDP) politicians. But the underlying problems remain, and shallow political opportunism is derailing reforms vital to Japan's future economic recovery.

JAPAN, INC.

By slowing reform, Japan risks losing whatever economic momentum it has recently achieved. Self-sustained growth seems frustratingly elusive. Vital indicators of economic health, such as personal consumption and business investment, remain weak. The decline in capital spending appears to have leveled off, but consumer spending continues to shrink. High-profile corporate failures are still causing mass layoffs. Many companies are trimming wages, bonuses, and work forces. Unemployment has reached unprecedented highs, according to records dating back to the early 1950s -- hardly a boost to consumer confidence. And consumer spending is unlikely to revive until the job outlook improves.

The only big spender in Japan today is the government, which launched nine mammoth stimulus packages, totaling $1.2 trillion, between 1992 and 1999. The country's very modest return to growth in the first half of 1999 was fueled almost entirely by state largesse. Aggregate demand rose directly in line with increases in public-works spending. But when the effects of

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