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Japan: Asia's feeble leader

Japan is stuck in a time warp. Little has changed, and what has is for the worse. The economy is in dire straits. Half-hearted reform erodes the real incomes of households and corporations without the stimulus of real supply-side deregulation. Household savings rates are already historically low. Export demand is waning. The economy will be down this year and next.

The Bank of Japan's (BoJ) balance sheet is exploding. In the financial sector, the authorities have backed off from cleaning out bad assets and loans and letting the bust go bust. Money will be made available to all - good and bad institutions. The price will be surface calm, while behind the scenes things go from bad to worse.

When I visited Japan last month, before the announcement of the new fiscal package, there seemed to be a lot of disarray among key policymakers. The BoJ thought that a weak yen was the acceptable consequence of a recessionary economy. It agreed that the need to bolster the banks and satisfy a massive flight to liquid assets would result in a big growth in power money. But it argued any price-keeping operation (PKO) - the buying of stocks to save the equity market - would not be considered by any reasonable person.

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