Japan had grossly overinflated prices because of its flawed system. I don't see this kind of deflation as unhealthy. In fact, I think it is fundamentally healthy. If the cost of doing business and the cost of living in Japan go down, people are going to end up investing more and buying more. This is the only way to get the economy growing again.
How long will it take to turn the economy around? I would think that if everything went right, we could see within a year or two a significant change in the sentiment in Japan, and momentum in the positive direction. If everything goes wrong, it will be a slow, three- to-five-year process. I see enough change under way that I am confident that Japan is now on a different track.
Ultimately, a resurgent Japan would be good for the United States. We are now living in an era--slightly tempered by the economic downturn- -where too many Americans think we've got everything right. The U.S. has gotten a lot of things right, but there is substantial inequality-- which is unsustainable. We also have a weak education system, are not graduating enough scientists and engineers to replace those who are retiring, and are not investing in basic science and technology.
So, we have some real issues in the United States. And a good thing about having renewed competition from Japan would be to once again motivate us to address our weaknesses--rather than just pat ourselves on the back.
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