For Japan, a Long, Slow Slide

Pedestrians are reflected on a market board in Tokyo. Following a decline of 12 percent in 2007, Japan's stock market is off 11 percent so far this year. (By Katsumi Kasahara -- Associated Press)

A jump toward restructuring did occur here after the bursting of the bubble in the 1990s.

Junichiro Koizumi, prime minister from 2001 to 2006, moved more aggressively than any postwar Japanese leader to overhaul the banking system, deregulate big business and open up the economy. His government convinced many investors that "Japan is back," and the stock market rebounded.

But under his successors -- Shinzo Abe and now Yasuo Fukuda -- the momentum for change has stalled. In recent months, there has been re-regulation.

New building codes hobbled the home-building industry, sending housing starts last fall to a 40-year low. New lending regulations created a credit squeeze for small businesses. For the first time since 1990, Japanese companies are increasingly buying each other's shares to stave off acquisition by foreign companies, according to research done by Nomura Securities.

Japan's foreign minister, Masahiko Komura, said last month that the government might consider requiring long-term foreign residents to prove proficiency in speaking Japanese, a suggestion that spooked foreign businessmen here.

Regardless of government policy, some downward drift of Japan from its lofty economic perch is natural and inevitable, according to economists and business leaders.

Japan's spectacular flush of manufacturing wealth after World War II was, in many ways, "lucky," said Matsumoto, the investment company executive, who is a student of Japanese economic history.

"The government took a huge bet on a few strategic industries -- like steel and automobiles -- and it worked," he said. "It took our economy up to second place in the world. It is totally abnormal for a country with 127 million people."

Citing the rise of China and India, Matsumoto says global capitalism is shifting patterns of wealth creation in a way that more closely links a country's gross domestic product with the size of its population.

What concerns political and economic analysts is that many Japanese politicians -- and the voters they represent -- do not understand how wealth is being created in the 21st century.

"The current leadership of Japan came of age during the incredible success after World War II," said Matsumoto. "They think that what worked then will work forever."

Special correspondent Akiko Yamamoto contributed to this report.