A Clouded Outlook

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Andreas Seibert for TIME

Up against it Salarymen in the town of Sendai take a cigarette break. Many Japanese companies are no longer as competitive as before

Sometimes Japan seems to be on the wrong continent. Everywhere else in Asia, from Shanghai to Mumbai to Jakarta, there is an aura of perpetual motion, a sense that tomorrow will be better than today. The region is on a frenetic 365-day-a-year hurtle into a brighter future. Japan once shared Asia's dynamism and mission. But not anymore. Today, Japan is an island of inertia in an Asia in constant flux. Japan's political leadership is paralyzed, its corporate elite befuddled, its people agonized about the future. While Asia lurches forward, Japan inches backward.

And yet no one in Japan is doing very much about it. For 20 long years, ever since the spectacular collapse of a stock-and-property price bubble in the early 1990s, the economy has existed in a near cryogenic state. The postbubble period of malaise called the "lost decade" has stretched into the lost decades. Growth has been practically nonexistent, the welfare of the Japanese people has suffered and the old industrial titans of Japan Inc. are retreating on the world stage. Japan will likely lose its cherished status as the world's No.2 economy this year, to a more energetic China. Though that was inevitable, the fact that China is so quickly closing the gap in economic power doesn't bode well for Japan's standing in the world.

Every few months, Tokyo's political revolving door spits out a new Prime Minister (Japan's had six PMs in the past four years) who inevitably vows that the time has come, finally, truly, to reform. But the proposals announced with expectant fanfare usually get swallowed up in Japan's dysfunctional political system. Even Prime Minister Naoto Kan has acknowledged the atmosphere of suffocating hopelessness. "There is a growing feeling of being fenced in," he told the nation upon taking office in June, "a vague sense that the whole country is being stifled."

Kan is the latest political leader to promise a breakthrough. The former Finance Minister has proffered a growth strategy he calls the "Third Approach" — an agenda mixing European welfare-state policies with government-supported efforts to create jobs in promising sectors like green energy and health care. But Japan's political process instantaneously became his ball and chain. In July elections, frustrated voters stripped Kan's Democratic Party of Japan (DPJ) of its majority in the upper house of the Diet, the country's parliament, less than a year after sweeping the longtime opposition party into office in a landslide triumph. The continual disarray in Japanese politics threatens to make Kan's attempts to reform the economy even more difficult.

Time may finally be running out for Japan. In the wake of Greece's sovereign-debt crisis, investors have begun focusing on the sick state of national finances in the industrialized world, and Japan's are among the sickest. Decades of fiscal mismanagement have saddled the government with debt equivalent to nearly 200% of the country's entire economic output — the biggest burden among developed nations — and pressure is building on Kan to introduce painful austerity measures. "There is an awareness that things can't stay the same," says Jeffrey Kingston, director of Asian studies at Temple University's Japan campus. "The problem is, people really don't know what is next. Japan's huge problems are just festering and Japan remains rudderless."

From Dynamo to Dinosaur
In many ways, Japan is a glimpse into a possible future for the U.S. and Western Europe. The Japanese have been struggling with major issues — an aging society, a fiscal disaster, weakening competitiveness — that the West is beginning to contend with as well. Japan's struggle today starkly shows the perils of inaction, of allowing domestic political calculations and ideological inflexibility to take precedence over the pragmatism necessary to thrive in a changing world.

What makes Japan's story so much more frustrating is that not so long ago, the nation was at the forefront of change. Japan's bureaucracy-led economic system was heralded as a growth machine superior to the more laissez-faire approaches of the West. The management practices of Japan's biggest corporations — from ultra-efficient "just-in-time" manufacturing processes to consensus-based decisionmaking — were the envy of the world. Long before Apple's iPad, it was Japan's Sony that invented the must-have gadgets that changed global lifestyles (remember the Walkman?). Japan didn't need answers; Japan was the answer.

Yet those same policies and practices that sparked Japan's miracle have come to strangle it. Japan has remained wedded to the same basic growth model it used in its miracle years — bureaucracy-led policymaking and a die-hard devotion to exports and manufacturing — even though it no longer fits Japan's modern, high-cost economy or keeps the country competitive. Though Japan's financial sector generally avoided the subprime-induced meltdown that hit the U.S., it got smacked much harder by the global downturn. In 2009 the economy sank 5.2% compared to 2.4% in the U.S.

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