TOKYO — When the Federal Reserve cut a key interest rate by three-quarters of a point this week to bolster the U.S. economy, the Bank of Japan's board of governors could only watch and wish it had room for that kind of aggressive action.
In Japan, the prime rate is just 0.5%. With borrowed money already nearly free, the central bank can hardly prime a stumbling economy -- the second-largest behind America's -- with even cheaper cash.
So as the Nikkei stock index suffered its biggest two-day drop in 17 years this week and the minister for economic policy lamented statistics showing Japan no longer had a "first-class" economy, politicians and central bankers lined up to reiterate that the best course of action was to do nothing.
It was further proof that the "Japan is back" mantra of two years ago is dead. Disillusioned investors -- foreign and domestic -- are pulling money out of Japanese markets, which were among the world's worst performers last year. While investors were reaping big gains in China and India last year, the Nikkei lost 11% of its value.
"A couple of years ago, there were lots of expectations of impending structural changes that were built into the foreign investment coming into Japan," said Richard Jerram, a senior economist at Macquarie Securities in Tokyo. "But over the past two years, it has become clear that nobody in Japan really wanted it."
The mood was different under Prime Minister Junichiro Koizumi, when the buzzword was reform and there was widespread anticipation that Japan was ready to start opening its insular economy.
Politicians talked of the need to boost investment from abroad, even if that meant foreign ownership of Japanese companies. The concept of shareholders' rights was gaining a toehold. Small investors were rushing to stock markets.
The result was a turnaround from more than a decade of economic drift that followed the bursting of Japan's bubble economy. Long-depressed real estate prices began to recover and the country went on a run of consistent, if not spectacular, growth.
But the appetite for change largely evaporated with Koizumi's retirement in 2006. The rebound had created economic losers as well as winners, and public debate shifted from reform to finding ways to alleviate the income disparities that emerged. Koizumi's successors sought to assuage some of the wounds opened by his confrontational approach. Their balm was to usher Japan's traditional pork-barrel politics back into style.
