Why Japan's Economic Good News May Be a Dead-Cat Bounce

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So whats to be done? The Japanese government cant keep pumping massive amounts of public cash into the private sector, and even if it could such infusions are largely beside the point. "Japan is so far into recession," says Baumohl, "that traditional measures may not work anymore."

Couldnt the central bank lower interest rates to stimulate borrowing, la Greenspan? Not really. Japans interest rates are already less that 1 percent (as opposed to around 5 percent in the U.S., which is itself unusually low). And far from being in lending trim, Japanese banks are so shaky that people are trading their minuscule-yield savings accounts for mattresses and coffee cans.

What about that government money? Aren't the tax breaks and public works monies trickling down and being spent in stores? No - its getting stuffed under those same mattresses. "Any recovery has to start with consumers," says Baumohl, "and the Japanese, always a culture that emphasized saving, are truly in a desperate state. They need an incentive to start spending again."

The way to convince those terrified consumers to do that may be to persuade them that things are about to get much worse. That means printing money. Some economists, led by Paul Krugman of the Massachusetts Institute of Technology, think that inflation - and, more important, the prospect of more inflation to come - may provide the crucial incentive Japan needs. "By forcing prices up and eroding the value of the yen," says Baumohl, "you might convince people that whatever theyre going to buy, theyd better buy now, because in a month itll cost more." The same goes for saving - why hoard your yen when theyre steadily decreasing in value?