The recovery of the Japanese economy, long stuck in low gear, is heartwarming. Japan's gross domestic product should grow about 3% this year -- not spectacular but far better than the past decade's 1% average. Even Japanese consumers are becoming more optimistic, with household spending up by more than 5% from its level the previous year.
Yet even with all this good news, Japan needs to redouble its economic and reform efforts -- and not slack off. The government must encourage banks to keep writing down bad debt -- still 6% of all credit, concentrated mainly in the regional banks. Japan's manufacturers, temporarily buoyed by record-breaking demand from China, need to understand that they have to keep cutting capacity and boosting productivity. And politicians need to realize that they just can't keep running big budget deficits.
The rest of the globe prospers from a revived Japanese economy, the second-largest in the world. Now Japan's political and business leaders must keep it that way.
Copyright 2004, Bloomberg L.P.
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