There appears to be nothing to cheer about in Japan's economy as it enters 2002. Virtually every economic indicator points to further stagnation. Unemployment is at a record 5.5 percent. Corporate earnings continue to decline. Particularly worrisome is the bad-debt problem in the banking sector, which, along with persistent declines in prices and output, threatens to send the economy into a deflationary tailspin. That is a worst-case scenario that must be avoided by all means.
Most private think tanks estimate that the economy will contract in real terms in fiscal 2002. It would be the first time since the end of World War II that GDP has dropped for two straight years. The government, which predicts zero growth, is decidedly in the minority. The economy will continue to stagnate even if a banking crisis is averted.
Reforming the banking system is, therefore, of critical importance. Defusing the debt bomb requires that banks clear their balance sheets of nonperforming loans. This also requires that deadbeat corporations clean up their excess facilities and liabilities, which have proved a heavy drag on growth. That is going to be a painful process, but it cannot be avoided in order to correct supply-demand imbalances and remove structural bottlenecks in industrial development.