There was a time when the Japanese economy was going to take over the world. In the late 1980s, Americans and others worried out loud about Japanese buying too many foreign companies and dominating certain markets.
Nowadays this nation's economy, although still the world's second largest, seems like a bear that can't stop hibernating. No matter how strenuously government officials insist that a solid economic recovery is under way, bad news undermines their assertions.
Last week's 10.6 percent drop in share prices on the Tokyo Stock Exchange was another example of this trend. If the fall continues this week, as many analysts predict, the result could be a new set of troubles for Japan's already beleaguered banks. Among other things, the drop might again stifle the stop-and-start recovery.
The government has been hoping that the turnaround, which began in late 1993, is strong enough to allow a modest sales tax increase, from 3 percent to 5 percent. With the new year, the government has also ended years of tax cuts.
Proponents say these steps are necessary to stop a widening budget deficit. The government has spent more than $700 billion since 1992 on "economic stimulus" - spending packages designed to create growth. One result has been a lot of road repairs. Another has been huge amounts of public debt.
No one doubts the need to shrink the debt, but the question is timing: Is the economy in good enough shape to handle a little austerity?
Not yet, according to some analysts. "They are making another bad policy judgment," says Richard Jerram, chief economist for ING Baring Securities (Japan) Ltd., referring to the government. "They are going to put up taxes and the economy will slow down."
Last week's market collapse suggests that many investors agree with Mr. Jerram. The rapid pace of the decline indicated that more than rational economic decisionmaking was at work.
"It has to be a mania," says an economist at another investment house, who asked not to be identified, in comparing market players to a "herd ... heading for the door."
There is a deep-seated uncertainty about the way the government has managed the economy in recent years. Prime Minister Ryutaro Hashimoto has been in power for a full year - a fairly long time given Japan's political instability in the mid-1990s. But he has not yet managed to convince the markets that he has the power to make some key adjustments in the economy.
Politicians, economic analysts, and businesspeople have spoken with increasing unanimity over the past year about the need for reform. They say that certain industries must be deregulated, that government bureaucracies must be dismantled, and the economy as a whole must take on more free-market characteristics.
But accomplishing these seemingly straightforward goals is tricky in Japan. The copious government oversight of the economy is one reason this country grew so rapidly after World War II. Officials have also ensured extremely high levels of employment and an enviably egalitarian distribution of wealth, things the country does not want to abandon.
Some heavily regulated industries have also been a key source of political money, another reason economic reform in Japan involves altering more than just the economic system - it means political and social change as well.
"Where we should take the economy has not been fully established," says Mineko Sasaki-Smith, chief economist at Credit Suisse First Boston (Japan) Ltd. She foresees a grim period ahead, with businesses unable to compete globally and the government unable to provide the leadership necessary to change the old systems.
But some analysts look at last week's sudden decline in share prices and see an ultimately positive mechanism at work.
"The market will force the authorities to undertake" reform, says Cameron Umetsu, an economist in the Tokyo office of UBS Securities Ltd.
Indeed, some companies have taken some steps toward restructuring, and for the first time in years research-and-development spending increased last year, a sign that companies are investing in the future.
A more immediate concern, however, is the state of the financial industry. Saddled with hundreds of billions of dollars worth of bad loans - due to a collapse in land values dating from the late 1980s - Japan's banks are on shaky ground. Some big banks have merged and smaller institutions have failed in recent years. Experts say further consolidations are inevitable.
If the market continues its rapid decline, some Japanese institutions will be unable to meet international banking standards. The banks are allowed to count unrealized gains on stock holdings as assets, but those assets evaporate when the value of the stocks declines.
The government has kept interest rates low, again in the effort to spur growth. But although credit is extremely cheap, a renewed banking crisis would make it harder for companies to borrow money. That could threaten the recovery.
It does not seem that the government will step in, as it has often done in the past, to prop up share prices. Officials said last week that the tax hike and a relatively austere budget, both set to go into effect this April, will proceed as planned.