Outlook: The Japanese blues are here to stay

Whenever something calamitous happens in the Japanese economy, a string of commentators, generally American and British, invariably come crawling out of the wood work to opine that it is always darkest just before the dawn, that things can hardly get worse and that the event should therefore be seen not as a reason for giving up on Japan, but as a buying opportunity.

Something like this has been argued in each of the last five years, and it generally causes a little rally in the Nikkei over the summer months, fed by ever hopeful overseas investors. One person unashamedly to have adopted this stance was Ken Courtis, vice-president of Deutsche Bank Capital Markets in Japan and a recognised international guru on the Japanese market. He argued powerfully at the beginning of this year that the worst was over, reform was on the way, and it was time to buy Japan.

This story is recounted not out of the sole purpose of embarrassing Mr Courtis, who in the past has had some good calls on Japan, but by way of warning to those who would see the collapse of Yamaichi as a cathartic experience that will galvanise the Japanese into action and bring about that long awaited bounce in the Nikkei. Unfortunately there is scant evidence of this occurring, and until there is, those who argue that things can only get better are just bottom fishing.

The Japanese Government has not yet committed anything by way of public money even to the business of bailing out the country's insolvent banks, let alone the massive fiscal stimulus Japan so desperately needs to pull itself out of the doldrums. As our Monday columnist, Gavyn Davies of Goldman Sachs, has argued, without this package Japan will limp on for years to come, her already weakened condition made infinitely worse by the collapse of the Asian Tiger economies.

So far equity markets in Europe and the US have proved remarkably resilient to the horrors of the Far East. Having shown unnerving signs of crashing in late October, markets have since "uncrashed" and the overall correction in developed economies has been modest. Japan will obviously provide another important test when it begins trading again in the early hours of today after its long three day weekend. But at this stage it is looking as if Armageddon has once more been postponed. For the time being, markets seem happy to dismiss warnings of the export of Japanese deflation into the global economy as alarmist nonsense.

In any case, some good is plainly bound to come out of it all. Markets are forcing the pace of change, exposing and trouncing the corrupt and cronyish practices of these largely protected economies. Aid from the International Monetary Fund to the Tiger economies is coming at a high price in terms of structural reform. Events are plainly moving much more swiftly than the Japanese Government would like, but markets are in fact only imposing in the brutal way they often do what official policy is already bent on achieving.

It is always easy to forget in describing the Japanese economy that it is essentially a tale of two economies. While the protected service, construction and financial sectors have continued to flounder, Japan still has a whole raft of internationally competitive, world class companies (Sony, Toyota, Cannon), which have remained immune to the present crisis.

Japan's awakening to reality in its own domestic economy has been a long and difficult one. The real world is proving a rather more brutal than the one Japan has traditionally inhabited. Structural reform may be the only way out for these economies, but the road to salvation is a highly painful one. Certainly it is in itself unlikely to prove conducive to a revival in the Japanese stock market. To most external observers it is obvious that Japan needs to accompany structural reform with a massive fiscal stimulus. Unfortunately, this is by no means obvious to the Japanese Government.