Japan’s economy was one that everyone wanted to emulate. Now after a seemingly unending period of poor performance, everyone is urging Japan to continue its reforms even though the economy is improving. The economy initially recovered from its third recession in ten years on the coattails of strong exports to the U.S. and China. But now, once again Japan is struggling to recover from a deep recession which has been exacerbated by the precipitous drop in world trade.

Japan’s problems continue to stem in part from both political and economic structural imbalances. And these problems have made it virtually impossible to untangle the after effects of the 1980s stock market collapse and real estate bubbles. When Junichiro Koizumi became prime minister in April 2001, he promised to rid Japan of its bad debts and bankrupt companies and get the country growing again. Although he made some progress, much more needed to be done. Since Koizumi left office in 2006 when his term in parliament expired, the political system wobbled. The Democratic Party of Japan (DPJ) was swept into power in September 2009 but has unable to keep a prime minister in office for very long. Because the DPJ is made up of divergent groups, there has been incessant bickering with the result that few new policies have been enacted and the party’s grip on power seems to be teetering. The current prime minister is Yoshihiko Noda. He replaced Naoto Kan who had been under fire before the earthquake and tsunami and even more so after.

Historically, Japanese companies have relied more on bank financing than equity and bond issuance. The economy consists of two distinct tiers: the large and powerful multinational companies and a plethora of small, often family-owned, enterprises. Manufacturing has been the mainstay of Japan's economy since the 1960s and today accounts for just over 20 percent of current-price GDP. The electronics and car industries continue to dominate Japan's manufacturing sector and are household names in international markets. But both industries have suffered in recent years from the strength of the yen, which has forced them to move manufacturing facilities to lower-cost countries in order to remain competitive. Another feature of Japan's economy is the high rate of investment, both in the private sector and, more recently in the public sector (largely because of the endless stream of fiscal stimulus packages).

The country was upended by the March 11, 2011 earthquake and tsunami and the ensuing power and supply chain problems which have made a return to a new normal difficult. A weak government has underlined the difficulties that lay ahead for the country.