An appropriate way to address the financial health of Japan is to look at Japan's past and present situation. Only then can we accurately generate ideas to assess Japan's ability to perform in the upcoming years.

After the Second World War, the Japanese people banded together to develop their nation into the world's third largest economy. Men worked incredibly long hours and sacrificed their families' health for the company. In return, companies promised lifetime employment and pension plans. Women obediently stayed home to hold the family together. The sacrifices of the war generation paid off for the third and fourth postwar generations. These generations were raised in an atmosphere of excess. Consumerism was the new postwar mantra for Japan.

An excellent working relationship between the banks and giant manufacturing conglomerates helped maintain Japan's prosperity in the Asian arena. For example, large companies often relied on the same banks to fund their projects. A visible social manifestation of the company-bank relationship is the drinking that goes on every weeknight between Japanese businessmen and their co-workers. The lack of competition between banks for corporate clients afforded a streamlined and efficient financial system for unrestricted corporate growth.

Three factors directly caused the bubble economy to burst in 1992. First, Japanese authorities were excessively increasing the money supply. Second, the public expected the economic growth to last indefinitely. Third, the banking system was faulty. The prices of assets such as land increased at a greater rate than their real value. As a result, the banks did not question projects because they figured that the appreciation of land value would cover unforeseen losses.

Presently, consumer confidence in Japan is at an all-time low. Japan's unusual problem with her demographics will heighten the financial turmoil. Japan's elderly population is increasing at an astounding rate. Word has it that by 2020, 26.84 percent of Japan's population will be aged 65 or over. The group holding much of the wealth earned during the postwar era is the elderly population. Unfortunately, with rising demands on the pension system, the elderly population is more inclined to save their assets in hopes that it will appreciate in value. One must remember that Japan's large labor force contributed to the growth of the nation's GDP in the years after the war. However, with the number of people able to work decreasing, meeting the GDP growth rates of the past will be increasingly more difficult.

Today, Japan is witnessing a deterioration of its traditional employment system. Lifetime employment, bonuses in line with the duration of company service, and corporate labor unions are being phased out. Japan is troubled by a low economic growth rate, increasing unemployment, decreased consumer spending, and tepid consumer confidence. To make matters worse, Japanese banks are unattractive to foreign financiers because of the Asian Economic Crisis.

On the other hand, Japan's role in East Asia cannot be overlooked. Recently, Japan agreed to help South Korea by issuing one billion dollars in long-term loans. Japan is still an economic power to be considered in Asia despite its domestic problems. Japan has experienced several downturns and remarkable recoveries in its postwar history. Japan successfully recovered from the 1973 global oil crisis and from an unusually strong yen in 1986 which sent her export numbers plummeting.

Speaking of recovery, perhaps an increase in technological development will provide more higher paying job opportunities for a shrinking labor force. Once GDP figures resume growth, inevitable structural reform will increase the feeling of financial security in Japan. As a result, if consumers see hope for future growth, domestic spending will increase and serve to ameliorate Japan's current problems. In any case, as U.S. stock prices continue to soar and the DOW posts record gains, American policymakers need to carefully study the Japanese situation in order to avoid making the same grave mistakes on American soil.

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