The causes behind persistent economic stagnation in Japan are manifold. They range from ageing population to global recession to competition from the emerging Asian economies. The remedy lies in boosting domestic demand and taking advantage of technological prowess that Japanese firms have enjoyed since long.

It is a tough task to reach the full employment level of output in an economy, and then equally tough to stay at that level. While achieving full employment for all resources, especially the labor force, is the most desirable status for any government, the repercussions of such an achievement are often scary. In an economy where the labor force does not expand due to very low population growth rate, full employment implies that the economy has reached the pinnacle of output, and further growth of the national income is not possible. Not only is it difficult to sustain such performance, but also economic downslide becomes imminent with a slightest trigger. Such a downturn leads to a low economic growth, or even a shrinking economy, rising unemployment and deflation. Japanese economy has been passing through such a phase since quite some time now.

An economy which emerged as the world's factory floor after the World War II, due to its fast technological advances and cost-effective production processes, has faced repeated and long phases of economic slowdown and recession over the last two decades. Unfortunately, the phases of recovery are very short-lived and various socioeconomic factors have contributed to the woes of the third largest economy of the world.

A comparison of the composite growth rate of the 12 largest economies of the world indicates that Japan has one of the lowest economic growth rates (Figure 1). Even in more recent times, the quarterly growth rate of GDP has ranged from -8.67% to +4.50% during the last six years (Figure 2). In October 2010, industrial output shrunk by 2.0% as against the expected shrinkage of 1.8%, and capacity utilization during the same period has been -2.3%. This is coupled with increase in joblessness, with the unemployment rate hovering around 5% and a general deflationary situation in the economy during these years. These factors, along with a strong Japanese yen have resulted in a severe damage to the overall business sentiment for the 2010 Q4, as it stands projected down from +13.3 in Q3 to -8.0 in Q4.

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