Signs of a recovery in China's growth rate offer the tantalizing hope of stronger demand for Japan's exports — if only territorial tensions are kept in check.
Tokyo's first policy priority should be to defuse the antagonisms with Beijing that sparked sometimes violent protests in China during September, and are fueling a backlash against Japan and Japanese products, especially cars, Baader said.
"I don't think this can be done overnight and I don't think Chinese consumers are going to suddenly rediscover their love of Japanese products," he said. But eventually, "whether it's three or six months, people will forget. And Japanese products are of course highly desirable."
The Japanese yen has remained excruciatingly strong, for its exporters at least, due to the country's status as a safe haven for investment.
Rather than a gradual depreciation that might erode investor confidence, Baader says that what is needed is a sudden intervention that would take the yen to between 85 yen-95 yen per dollar, or perhaps even higher, from its current 79 yen to 80 yen per dollar.
In the longer run, wider reaching, more painful reforms will be required to regain sustainable growth, said Rea of Capital Economics.
Despite their generally meager, often declining profitability, Japan's megabanks, trading houses and other big corporations are sitting on huge cash piles. Instead of investing at home and hiring Japanese workers, they are using those resources to snap up assets around the world, such as Softbank's recent acquisition of Nextel.
The central bank's policy of keeping interest rates near zero for many years has done little to change that.
"'They've done as much as they can. Monetary conditions are about as easy as they can get. No one wants to borrow. No one wants to invest, because there is no positive outlook for growth," Rea said.
More crucially for world finances, Japan must finally grapple with its national debt, now at an unsustainable level of some 235 percent of the country's GDP.
Dealing with that problem requires spending cuts and even bigger tax hikes than a planned increase in the national sales tax to 10 percent which is due to take effect in 2014.
"We don't see imminent funding stress for Japan, but the longer the debt continues to rise, the greater the risk of some kind of shock," said Andrew Colquhoun, head of Asia-Pacific Sovereigns at Fitch Ratings in Hong Kong. "Ultimately, stronger economic growth and fiscal consolidation are Japan's best hope of reducing its public debt ratios."
For now, Japan's economy is cushioned by massive investments in its own debt, which protects it from any sudden major shifts by foreign investors, and by its massive earnings on foreign investments by its own financial institutions and corporations.
Bereft of domestic engines for stronger demand, the government has acknowledged it needs more free trade deals to gain maximum access to markets for its exports. It needs to revitalize industries and boost use of renewable energy and use its labor force — especially its fast-growing senior population and women — more effectively.
Despite more than two decades of stagnation, so far there has been little progress toward such reforms. Frequent changes in leadership — six prime ministers in just six years — have further undermined momentum for change.
"People talk about things but they don't do anything," said Kenneth S. Courtis, an investment banker and former Goldman Sachs vice chairman. "The political system is going in one direction and the economy is going in another direction."
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