ABSTRACT
Five scenarios contend for the most accurate portrait of Japan’s future:
Continuing Decline. Japan will continue to decline, suffering stagnancy and perhaps even declining living standards.
Macroeconomic Cure. As a mature country, Japan cannot recover past growth levels but can perform well after macroeconomic mismanagement and banking problems are corrected.
Muddling Through. While Japan could benefit from structural reform, many vested interests would be hurt. Hence, Japan will “muddle through,” growing at suboptimal rates with slow—but acceptable—improvement in living standards.
Early Revival. Structural reform is occurring, and revival is likely within a few years.
Structural Reform. Japan will have to reform because the political economy cannot survive with low growth. Once Japan reforms, it will again become vibrant. However, political-social obstacles mean reform will take a decade. Critical components of reform include openness to imports and foreign direct investment (FDI).
