ABSTRACT
Japan’s postwar economic performance is remarkable.1 In fact, with the exception of World War II and its immediate aftermath, the overall economic development of Japan starting with the Meiji Restoration in 1868 to the late 1980s is impressive by any standard. Rising from the ashes of defeat in World War II Japan achieved “Asian Miracle” status by the late 1980s. At this point, however, Japan fell into an economic, financial, and political malaise that continued through 2002. Starting in 2003 Japan began a tentative recovery. Real GDP increased in 2003 (Figure 5.1), but slowed in the first three quarters of 2004 with a quarter-to-quarter change of 0.1 in the second quarter (Bank of Japan, January 2005). Price deflation has decelerated since 2002 (Figures 5.2 and 5.3), with predictions that it will end in 2006. There has been progress in reducing financial distress. Nonperforming loans remain large in the banking system, but have declined in the past few years as the Financial Services Agency increased pressure to reduce nonperforming loans and has indicated that nonperforming loans should by March 31, 2005 be half of their level in March 2002. Japan is well past the risk of large bank failures that concerned many in the late 1990s.
