Hamish McRae: Mr Koizumi must find a cure for the Japanese disease before it's too late

So the Japanese can learn from Britain. Or so its new prime minister, Junichiro Koizumi, told Tony Blair during his swing through London on Monday. But can he learn the right lessons? The fate of the world's second largest economy turns on that.

Sure, Mr Koizumi looks different from the mass of Japanese politicians – the hair, the irreverence, the zest – and the media in Japan loves that. But we don't know yet whether he can really thump through radical reform, still less whether such reforms as he does make will cut the mustard.

Yes, he says all the right things and is loved by the media. But media acclaim in Japan, as elsewhere, is a fickle thing. Besides, he has a reputation of being a bad picker of people. The fact that he chose a little-known 79-year-old with little experience in finance for the crucial post of finance minister boded ill.

When he says that he has been influenced by Britain this is not just flattery. Mr Koizumi spent a couple of years here in the late 1960s, a period when Britain was starting to confront the failure of the post-war generation of politicians, though the revolution was still 10 years off.

The parallels are intriguing. During the war and its aftermath our elite had been most effective: the conduct of the war itself, the creation of the welfare state, the dismantling of colonialism, the fostering of scientific progress as witnessed by the world's first commercial atomic power station. But by the time of Mr Koizumi's visit the relative failure of the UK was becoming clear. It was the days of "the English disease".

Ten years ago, Japan's political elite could claim great success too. The Japanese economy had not only caught up with the US (and surpassed Europe) but it seemed likely to overtake it. Japanese companies dominated world markets, Japanese banks were the largest, and the value of the Tokyo stock market nearly surpassed that of the New York one.

Here in Britain, learned writers argued that we should adopt the Japanese economic model, with stronger government planning and closer links between industry and finance. Germany, the European nation closest to the Japanese model, was similarly admired, while the US system was reviled.

Now the mood has gone though 180 degrees. Japan is the failure, for it alone among the large industrial nations failed to benefit at all from the 1990s boom. The US, and to a lesser extent Britain, have been the success stories. As for Germany, it has become the slowest-growing economy in Europe and the talk now is the danger that it might, horror of horrors, catch "the Japanese disease".

It is an astonishing turnabout and one that should be treated with a bit of caution. Both Japan and Germany have many deeply-rooted economic strengths and a little humility and caution is in order both for the US and Britain, where in both cases there are underlying weaknesses. Nevertheless the fact that people can talk about a "Japanese disease" at all is testimony to the size of the task facing its new prime minister. What is the task and how is he shaping up?

Essentially, Japan's problems are partly general economics and partly specifically financial. But the Koizumi government can't fix the economy until it fixes the financial system.

The problem is the banks are bust. Now they are not all bust and on most official calculations the banking sector as a whole is solvent. On some private calculations, however, the banking system is not. They have lent unwisely to companies that have invested unwisely. (Memo to UK government-watchers: beware whenever the word "investment" is used to justify spending, for lousy investment is spending without the fun – think Dome.) Because the banks have lent so much to duff companies they now have no capacity to lend to good ones.

Japan has just brought out yet another plan to rescue the banks. They can put duff assets, or rather some of them, into a new government-backed fund called the Banks Shareholding Acquisition Corporation or BSAC. (Not to be confused with the British Sub-Aqua Club, so no jokes about banks being under water, please.)

The details of the BSAC are tedious in the extreme but the received wisdom in Tokyo seems to be that it will not succeed in restoring confidence in the banks to a sufficient extent to enable them to resume lending to new and solvent customers. Insofar as it is possible to make a judgement, the sensible one would be to hope that the cynics are wrong but fearing that they are right.

A successful bank rescue scheme is a necessary but insufficient condition for a successful economic recovery. The new government has to sort out its own finances by cutting spending, a tough thing to do in recession, but its debts are so enormous that they cannot continue to grow. (For a frame of reference, the Japanese budget deficit is now more than 8 per cent of GDP, larger than Britain at the worst time in the 1970s.)

Japan also needs to push through a host of other measures to deregulate the economy: everything from shop hours to building regulations. And all this has to be done in the face not only of a Japanese recession – that is not really in doubt now – but a more difficult international economic climate too. Remember, too, that Japan is becoming the oldest society on earth, with the highest proportion of 65-year-olds and over.

Of these reforms all we know is a stated willingness to restructure: "I want to carry out reforms that could be called the 'New Century Restoration'," he said, referring to the Meiji Restoration of 1868, when Japan opened itself to world trade and adopted Western economic ideas. He has warned that such reforms will cause hardship – for example a rise in unemployment. But it is not clear that he has understood enough of the lessons of the US and UK over the last 20 years to make such reforms effective.

He talks of the need to "endure the pain of the present to make tomorrow better" and that message, for the time being, seems very popular. The trouble is that the pain will become increasingly obvious long before any gain accrues.