The past year saw Japan's economy continue to wallow in a quagmire of deflation. The problem was compounded by the bad-debt crisis in the banking sector. The recurring afterthought is that the economy is still paying a heavy price for the 1980s bubble. Even more dismaying is the realization that there is no effective cure for the deflation and that it will likely persist for some time.
The common remedy of the past -- boosting domestic demand through increased public spending -- is no longer a viable option, given the crushing government debt. Probably the only way out is to put the country's fiscal house in order and create a leaner economic system. Structural reform may sound like a hackneyed slogan, but the need for drastic and painful change cannot be overemphasized.
Deflation -- a continuous decline in the prices of goods and services -- has caused a staggering loss in asset value over the past decade or more. Stock and land prices have dropped by more than 1,158 trillion yen since the bubble burst in 1990. Moreover, the influx of cheaper imports from developing countries has accelerated price declines.
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