‘N o Reform, No Growth: Part Two” is the title of the government’s economic and fiscal report released Tuesday. A sequel to last year’s report with the same title, this year’s adds up to a reaffirmation of Prime Minister Junichiro Koizumi’s structural reform agenda. That is encouraging, yet people are left wondering whether Japan’s faltering economy will really get back on its feet.

The report offers a gloomy analysis. The economy bottomed out in the first quarter thanks largely to increased exports to the United States. But its dependence on foreign demand makes it vulnerable to external shocks. With internal demand weak, the economy could slip back into a yet worse recession should the U.S. economy hit the skids.

Deflation, it says, is likely to persist for some time. Businesses are heavily indebted and banks are overburdened with bad loans. Layoffs and wage cuts are continuing across a broad spectrum of industries. So jobs and incomes won’t increase immediately even if production picks up. Thus, routes toward a vigorous recovery are effectively closed.

Japan is plagued by two types of deflation. One is the decline in land and stock prices — a legacy from the collapse of the asset-price bubble more than a decade ago. The other is general declines in prices stemming from the influx of cheaper goods from developing countries and the weakness of domestic demand. This “double deflation” is adding to the bad-debt burden, which in turn is making it difficult to reverse the deflationary trend.

What needs to be done to revive the economy? The report proposes three broad courses of action: (1) Moving people, goods and money smoothly from low-productive to high-productive sectors; (2) improving corporate governance with a focus on efficiency; and (3) promoting research and development.

All are highly sensible approaches that can be found in textbooks on economics and management. The report is right to say that the bad-loan problem must be resolved so that business resources can be concentrated in high-productive sectors. But the question that really counts — specifically what should be done to achieve this — is left unanswered.

The report hits the mark on mounting competition from China. The emerging economic giant, it says, is in the historical development stage where domestic growth is generated basically through exports of labor-intensive products. The message is that Japan should deal with China realistically, instead of perceiving it as a threat.

However, the suggested approach to the changing structure of the international division of labor — concentrating resources in sectors of comparative advantage — is, again, nothing short of a textbook scenario, although the need for flexibility can never be overly emphasized.

That the Japanese-style management system must change also goes without saying. Here again, the real question is specifically what should be done to upgrade the outdated system. It is worth noting, however, that the report calls for changes in the tax code, including abolition of some personal income tax deductions and reduction of corporate income tax rates, which are said to be among the highest in the world.

As for the future of the economy, the report says the principle of accountability will be established centering on market-oriented transactions; improved safety nets will be provided to protect the weak against economic shocks; and technological advancements will play a major role in generating demand and growth.

That is not a very reassuring outlook for a postreform economy. The report was written by a powerful group of economists in the government, but it does not go far enough in addressing the real problems plaguing the economy. Admittedly, a white paper has its limits. Still, the public has a right to know more precisely how the government plans to cure deflation, the most serious economic malaise the nation has experienced since the end of World War II.

The economic and fiscal report, the successor to the Economic White Paper previously issued by the former Economic Planning Agency, was prepared under the direction of Economic, Fiscal and Financial Affairs Minister Heizo Takenaka, himself an economist, who joined the Koizumi Cabinet in April 2001 as the minister in charge of economic and fiscal policy. The “Takenaka report” is designed primarily to give theoretical backing to the Koizumi reforms, such as bad-loan cleanup, fiscal consolidation and social security reform. The report would have made more interesting reading if it had exceeded the bounds of tradition and presented bolder and more stimulating proposals.

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