Japan's lost decade heading toward the two-decade mark

December marks the 20th anniversary of the Nikkei 225 Stock Average's bubble-years peak of 38,915. Japan's “Lost Decade” began soon after.

In some ways, it has been two decades. The first — 1990 to 2000 — was a crisis-filled one. The second, which is still playing out, has been more stable, yet not without its own perils.

Even after Japan began growing around 2002, it was only because of the economic equivalent of steroids.

If you took away near-zero interest rates and massive fiscal pump-priming, growth would have fizzled.

So, in a sense, Japan's longest postwar recovery was a mirage.

Japan has yet to find the exit strategy the U.S. is now beginning to search for.

Getting a handle on political obstacles is an obvious first step toward ending Japan's funk.

The next is keeping balkanized infighting between factions from scuttling economic change. Two decades really should be long enough.

As Japanese finance ministers go, Hirohisa Fujii is setting a speed record for trashing his credibility.

Fujii's yen policy, or lack thereof, tells the story. One day, traders think he's fine with the yen's 13 percent gain versus the dollar over the last 12 months. The next, they are bracing for massive intervention in markets. Prime Minister Yukio Hatoyama's goal of wowing investors in his first five weeks in office isn't succeeding.

Worse, strategists already sense a kind of “balkanized gridlock” seeping into a government charged with keeping Japan relevant as China becomes more powerful.

If so, investors will be no happier with Japan's new leaders than the old ones.

“When Japan awakes this New Year's Day, it will wake to two utterly unpalatable new realities: Its economy will have been elbowed into third place by China and the 'Lost Decade' will have expanded past the two-decade mark,” says Nicholas Smith of MF Global FXA Securities Ltd. in Tokyo.

Investors are counting on Smith being wrong. The trouble is, Fujii isn't even Japan's weakest economic link. That would be Financial Services Minister Shizuka Kamei.

The man is clearly out of control and Hatoyama's inability to rein him in speaks to the factional nature of Japanese politics. It's not the political parties that matter, so much as the competing interests under their banners.

How Hatoyama's Democratic Party of Japan ended up with an anti-reform firebrand is a case in point.

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