But the rising interest rates in Japan, rather than being a problem, would be a signpost on Japan's path toward sustainable economic recovery. Japan has yet to pull the reflationary trigger to start a reflation that would include a rising stock market, a weaker currency, rising interest rates, and, most important, large purchases by foreigners of potentially valuable franchises in the domestic sector. The price that Japan must pay for a sustainable golden-age recovery is the sale of some valuable real assets, franchises in the financial and domestic sectors, which can be rapidly transformed into profitable enterprises by foreign capital and foreign managers. The Japanese economy could be modernized and internationalized to include world-class banks and producers. This process of global creative destruction, while expanding foreign ownership of Japanese enterprises, would not threaten the country's sovereignty or security.
Japan is a huge economy, the world's second largest.
Its corporate managers have demonstrated great skill and adaptability and are beginning to move quickly to modernize operations inside and outside of Japan. Undoubtedly, in a few years the Japanese economy could be modernized and internationalized to include world-class banks and producers, in both the domestic and the international sectors. The only question that remains is whether Japan's single party parliamentary system, led for more than four decades by the Liberal Democratic Party, will stand aside and let that occur. John H. Makin is resident scholar at the American Enterprise Institute. Click here for an index of Economic Outlook .