IN 2002 I stood almost alone among international observers of the Japanese economy in predicting that Japan's future was still bright--and that three percent economic growth was quite attainable over the next few years. Some, especially the prophets of a rapid Japanese meltdown, Argentina-style, mocked this prediction. Others were simply skeptical. But suffice it to say, the Japanese economy has now shown eight straight quarters of economic growth. Annual real growth in the third quarter of 2003 was at 3.3 percent--and an astonishing 7.5 percent in the last quarter-beyond my guardedly optimistic estimate. While Japan faces real problems-which have been discussed in these pages in past issues--they are far from permanent. And economic data have clearly shown that the pessimists are wrong. Japan is moving in the right direction, and growth is likely to be sustained for the next few years, barring an international convulsion.
Key to Japan's re-emergence is the fact that throughout Japanese history, determined leadership has arisen in response to crises, reshaping the nation's destiny. The impetus for change has brought about a turning point, allowing Japan to exit the counterproductive cycle of deflation, fiscal imbalance and public sector growth for structural economic reforms that will return Japan to an entrepreneurial society ready to reassert a leadership role in Asia and the world.
The institutional logjams affecting Japan both in the corporate and government sectors are well known. For now, though, it is clear that Japanese companies have begun to take the bitter medicine long prescribed by global investors. Firms have been buying back their own stock and some are consolidating through mergers or restructuring. Capital investments made, particularly in the manufacturing sector, are beginning to pay off.
Weltschmerz is rapidly disappearing from the Japanese worldview, and a dim fog seems to be lifting from the economy. For the second consecutive year, Japan will outperform U.S. and European markets. This is a modest achievement based on the postwar past, but a vast improvement over conditions in the 1990s. In most analyst surveys, Japan is the least popular region for investment relative to a benchmark global stock index. Skepticism is widespread, and as one Wall Street wag noted, "Japan is of no general importance except as a laboratory experiment for deflation."
This position is myopic. Unlike the herd of market analysts who only see the Japanese glass half empty, a new, more hopeful position is starting to emerge based on compelling evidence. For one thing...