After remaining in the doldrums for more than 10 years, the Japanese economy is now plagued by deflation. The Tokyo Stock Exchange's benchmark Nikkei index has fallen to the 8,500 level, and the nation's unemployment rate remains high. Last fall the government announced a policy package for expediting the disposal of banks' bad loans and promoting industry revival, and bank bosses are getting serious about their restructuring efforts. Serious problems remain, however, in implementing the package.

The fiscal 2003 budget, approved by the Cabinet last month with the fiscal 2002 supplementary budget, calls for an issuance of state bonds far exceeding the cap of 30 trillion yen set by Prime Minister Junichiro Koizumi. Officials say the issue is necessary to make up for a serious revenue shortage stemming from deflation, implement a 1.8 trillion yen tax cut for stimulating business investment and consumer spending, and increase expenditures on selected business sectors that are likely to stimulate private demand.

Newly issued bonds will account for 44.6 percent of the fiscal 2003 budget. The outstanding balance of long-term debts held by the central government and local authorities, except those relating to postal administration, will total 686 trillion yen, 137 percent of the gross national product. The ratio is the highest among industrial countries. The government is clearly laggard in fighting deflation and implementing fiscal reform.