An economist argues that the industrial policy that was miraculously successful in helping an underdeveloped Japan catch up to the West is now at the root of Japan's stagnation. For example, in response to the oil shocks of the 1970s, Japan increasingly used its industrial policy tools not to promote export-oriented winners, but to shield inefficient loser industries from competition. Japan's well-known aversion to imports also acted as a bodyguard to protected domestic cartels in inefficient industries. The end result is a deformed dual economy of strong exporters and weak domestic producers. To make matters worse, a mountain of bad debts is now weighing down the banking system. Without sweeping reform that goes beyond deregulation, Japan will be doomed to years of stagnant growth and political gridlock. Japan needs a modern political system with competitive political parties that could genuinely alternate in power, a modern financial system in which money goes to its most efficient use rather than to shore up political allies and cartelized backward industries, and a genuinely competitive corporate setup and a modern competitive distribution and retail system. Finally, Japan needs genuinely to open its doors to imports and foreign direct investment.