Internationale Politikanalyse International Policy Analysis Martin Schulz Country Analyses: Japan after the Crisis – From Recession to Permanent Decline? „ Japan probably provides one of the best cases for anyone looking for clues on how to deal with the current economic crisis. Unfortunately, this report serves rather as a guide to what should be avoided. Japan’s misery over the past two decades, since its own»bubble« burst in 1991, offers a strong warning that major reforms are necessary, both during and after any major crisis, and that neglect, in combination with deficit spending, may lead to permanent decline. „ Despite its past experience, the global economic crisis has come as a perfect storm for Japan. The country has not been hit by a financial crisis, but the»real« economy has crumbled. The main reason for this mess is that Japan has failed to reform its domestic service industry, focusing in­stead on half-hearted supply-side reforms to squeeze one more drop of productivity out of its»old industries«, such as cars and TVs, thereby re­maining dependent on exports and vulnerable to crises abroad. „ Surprisingly, as least as important is the failure to adjust to the chal­lenges of demographic ageing. A policy deadlock is blocking necessary reforms, suffocating Japan’s productive firms, producing ever more public debt and putting Japan’s flexible governance model and strong social part­nership at risk. The result is that Japan’s major companies are actively seek­ing a new future in businesses abroad. This opens up opportunities for further economic integration in Asia and beyond, but also carries the risk of future»investment wars« and protectionism, particularly involving Europe and the United States. JULY 2009