Japan's decade of decline is the worst fate suffered by an advanced economy since the Great Depression. Contraction in Japan, however, is not only Japan's problem--it is also a drag on the global economy. Japan's withdrawal of capital from Asia and a weakening yen contributed heavily to the Asian financial crisis of 1997-98. Since then, Japan's continuing slump has limited export earnings for emerging market countries, thus strengthening the backlash in Asia and Latin America against globalization and the "Washington Consensus." It is also exacerbating rather than offsetting the current global slowdown.
Japan seems unable to halt its decline, even though its problems are obvious, and effective, albeit painful, remedies are available. But Japan's very wealth and stability seem to be the sources of its inaction. In other words, when enough wealth remains to allow most Japanese citizens to travel the world and purchase luxury goods, to buy off with government programs those who are directly harmed by the recession, and the costs of this and other borrowing can be put off into the future, little political pressure for change can coalesce. Small wonder, then, that financial observers have wondered whether such a fate might befall other advanced economies. When stock market bubbles have burst and deflation appears in prospect, the question "Who will be the next Japan?" has taken on urgency for policymakers and markets.
