The stock market has reached 15-year lows. Bankruptcies have skyrocketed. Consumers are scared and, therefore, reluctant to spend. It is fair to say that Japan is, if not in, at least close to being in a recession. The most troubling aspect of the near-term outlook for the Japanese economy is the lack of policy options.
Many analysts are seriously concerned about a Japanese debt trap.
In the end Japan may have no choice but to stimulate both fiscal and monetary policy anyway. If the economy continues to slide and the banking system goes into another crisis, the BoJ is likely to pump a large amount of liquidity into the economy. One consequence of this will be a much weaker yen. DRI's baseline calls for the yen to fall to 125 to the dollar later this year. The downside risks, however, are huge.