Putting the pieces in place for Japan's economic recovery

Abstract

Just over a decade ago, the phenomenal economic growth of Japan was admired and even feared. It had pursued a successful strategy of industry upgrading to catch up with the West, maximizing bank-based, state-directed financing. Ironically, the very institutional setup that was required for success eventually resulted in a devastating economic downturn. Japan remains languishing in a state of economic stagnation, but that may change: market forces are now driving Japan to carry out major reforms. A market-oriented business environment is crucial, and thus Japan is being propelled toward deregulation and institutional reform. In particular, its traditionally protected, inner-dependent sector must be opened to competition in order to improve efficiency, and obstacles to direct foreign investment must be eliminated. Although the process is a gradual one that has been further hampered by the slump in the U.S. economy, dramatic changes are in motion, creating promising roles and opportunities for foreign investors as well as potential for Japan to realize a new economic vitality.