Looking back to 2000, the critical question hanging over the Japanese economy is: Has there been movement, or at least the preparations for a move, toward a new system befitting the start of a new century? The answer, unfortunately, is no.

The continuing plunge in the Tokyo stock market illustrates the grim state of the economy. Adding to the gloom is the slowing of the U.S. economy, which casts a shadow over the world economy as it moves into the 21st century. There is no reason to be overly pessimistic, but the truth is that Japan’s economy has made little or no real progress over the past decade.

The collapse of the speculative bubble in 1990 sent a wakeup call to all in Japan, particularly the government and the business community. But government leaders and corporate managers have failed to take full advantage of the lessons learned. That failure has turned the 1990s into a “lost decade” for the Japanese economy. With no solid signs of improvement at the end of 2000, the stock market had nowhere to go but down.

Prime Minister Yoshiro Mori is pushing an “IT (information technology) revolution,” which was the main topic at July’s G8 summit in Okinawa. But his drive to create an “Internet society” is not generating enough power to move the economy forward. The economy, which supposedly hit bottom last year, has zigzagged since the beginning of this year, expanding in the first and second quarters but shrinking in the third.

The main reason is that consumer spending, which makes up 60 percent of gross domestic product, remains almost flat. So the growth rate goes up or down as a result of slight changes in public-works spending, plant and equipment investment and exports. The government, which has pumped tens of trillions of yen into the system, is pinning its hopes on a pickup in private consumption. But consumers aren’t ready to loosen their purse strings anytime soon.

In a way, the slump in consumption reflects a welcome tendency among consumers to shift away from wasteful spending and toward rational spending based on a careful study of quality and price. This is evident, for example, in the so-called “Uniqlo phenomenon” — the explosive boom in sales of quality but cheap casual apparel at Uniqlo retail stores.

Fundamentally, however, ebbing consumer confidence mirrors underlying problems in Japan’s economy and society, such as persistently high unemployment and prospective cuts in social security benefits due to the falling birthrate and the ballooning government budget deficit.

The intensifying price wars have driven many retailers into bankruptcy. The collapse of the department store chain Sogo earlier this year is the most conspicuous example of retail-business failures. Daiei, a major supermarket chain that once led the “price smashing” campaign, fell into a trap of its own making — an aggressive expansion strategy based on optimistic estimates of consumer demand in a slumping economy. While many poorly managed businesses went under, others attuned to prevailing needs expanded by leaps and bounds. NTT DoCoMo, the mobile phone company, created a vast market for its i-mode cellphones that connect to the Internet. DoCoMo’s success story shows dramatically that goods and services sell well only if they are tailored to the needs of the times.

One of the grave mistakes committed by the government over the past decade is that it has continued to overestimate domestic demand. It believed that the wide supply-demand gap reflected a significant shortage of demand. The reverse was true, with supply exceeding demand by a wide margin. But the government, in a determined effort to stimulate demand, ratcheted up public-works investment.

The construction industry, which invested heavily during the hyperboom of the late 1980s, is a typical case of overcapacity. Many constructors are still struggling under heavy debts, and banks are moving almost in unison to bail them out by forgiving chunks of their debts. Banks themselves are still holding large amounts of bad loans despite a huge infusion of public funds, while insurance companies suffer from low returns due to dud loans and rock-bottom interest rates.

In short, poor management is the basic reason why Japan’s economy — both the public and private sectors — has been unable to shake off the negative legacies of the 1980s bubble. Many corporate managers have shifted the blame for their mistakes to the economic slump while the government has avoided supply-side reform in the name of economic recovery. The result, sadly, is that the corporate losers, with the tacit backing of the government, have dragged down the economy even as the winners — those that restructured the hard way — have given it a fillip.

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