The incredible shrinking prime minister; after promising a revolution of reform, Japan's Junichiro Koizumi is just more of the same.

• Author: Decker, Brett M.

Just as investors and analysts were beginning to write off Japan for good, Junichiro Koizumi galloped onto the political scene. Thumbing his nose at the business elite, the bureaucratic Mafia and the old guard of the ruling Liberal Democratic Party--the triumvirate that has colluded to control and manage the Japanese economy for decades--Koizumi pledged to rip the system out by the roots. Declaring that members of his party were either for him or against him, he vowed to remake the LDP or destroy it.

This brashness struck a chord. With opposition parties making inroads into the electorate and polls showing the LDP with its lowest approval ratings ever, a coalition of reformers and party members fearful of losing power combined to put the self-styled revolutionary at the helm.

In Japan, it was time for an economic revolution. After an unprecedented 12-year downturn, Japan needed a leader who recognized the nation's problems, comprehended what needed to be done, and had the guts to battle entrenched interests to reform a financial and political power-house risking collapse. Upon his accession to the premier's chair on April 24, 2001, Junichiro Koizumi promised to be that man. So far, he has delivered nothing.

Japan remains an economic basket-case. Public debt lingers around 150 percent of Gross Domestic Product; bad loans account for as much as 30 percent of GDP; industrial production fell 7.9 percent in 2001; and the Tokyo stock market is teetering. At the end of May, one U.S. dollar could be exchanged for 125.9 yen--45.9 yen more than two years ago. Unemployment, currently well above five percent, is the highest since the Japanese postwar economic miracle began.

And that's not all. Banks wrote off $60 billion in bad debts last year but haven't changed their lending practices, meaning more bailouts lie in the future. The only reason many Goliath corporations survive and massive projects continue is because the Bank of Japan maintains as close to a Zero Interest Rate Policy as possible. And when money is essentially free, it's rarely directed to worthy enterprises--especially when the government guarantees that the lion's share of the loans go to large inefficient corporations. This keeps operating cash away from promising start-ups and small and mid-sized companies that might actually work.

But Japan's economic woes aren't confined just to its islands. With the nations of the world increasingly interdependent on one another for stability...