Japan has been trying hard to get out of the horrendous clutches of recession and economic slowdown. With deflation on the rise, Japan has witnessed a decline in the interest rates with the rates falling to near zero. The banking system is in a dire state with Japanese banks topping the financial casualty list, holding non-performing assets of ¥52 tn. Though the government is planning a number of reforms in a phased manner, the recovery of bad loans will be essential to provide the much required boost to the economy. Is the sun really setting in Japan?

Seeing the next round of disappointing economic news from Japan has become as certain as witnessing the next sunset in the land of the rising sun. The constant aspect in Japan's rare favorable economic news has become the frequency at which they are downwardly revised or overshadowed by more sober reports at a later time, or in other sectors. Most significant about Japan's sweeping economic malaise is the accompanying deflationary spiral. An economy that drifted in and out of recession three times over the past decade now has to face up to the menace of falling prices and rising real cost of money. The economy is expected to have posted its second annual contraction, falling by 0.5%. The IMF projects 1.1% growth this year compared to 2.3%, 2.0% and 2.4% for the US, Eurozone and the UK.

Since 2000, Japan's economic growth contracted in four quarters, with most likely a fifth contraction in the final quarter of 2002. Partly thanks to the lagging impact of a 17% decline in the yen versus the dollar on Japanese exports fall in 2001 to winter 2002, Japan's GDP growth was resurrected into positive territory following a string of back-to-back declines in the last three quarters of 2001. But exports, the lifeblood of the nation's economic hope, received a blow in the first half of the year when the yen reversed all of its declines by end of summer 2002 as global investors found safety in yen assets seeking refuge from rising geopolitical uncertainty.

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