Japan's economy was one that everyone wanted to emulate. Now after over 10 years of poor performance, everyone is urging Japan to continue its reforms even though the economy is improving. The economy initially recovered from its third recession in ten years on the coattails of strong exports to the U.S. and China. And recent data have confirmed that the economy is growing domestically as well.

Japan's problems stem from both political and economic structural imbalances. And these problems have made it more difficult to untangle the after effects of the stock market collapse and real estate bubbles at the end of the 1980s. When Junichiro Koizumi became prime minister in April 2001, he promised to rid Japan of its bad debts and bankrupt companies and get the country growing again. Although there has been some progress, much more needs to be done. But the growing economy has muted the calls for reform. Koizumi's term ended the last week in September with the appointment of Shinzo Abe to succeed him. Now analysts wonder if prime minister Abe will forge ahead with the reforms already started or will he be stymied by the same political morass that engulfed his predecessors.

Historically, Japanese companies have relied more on bank financing than equity and bond issuance. The economy consists of two distinct tiers: the large and powerful multinational companies and a plethora of small, often family-owned, enterprises. Manufacturing has been the mainstay of Japan's economy since the 1960s and today accounts for just over 20 percent of current-price GDP. The electronics and car industries continue to dominate Japan's manufacturing sector and are household names in international markets. But both industries have suffered in recent years from the strength of the yen, which has forced them to move manufacturing facilities to lower-cost countries in order to remain competitive.

Another feature of Japan's economy is the high rate of investment, both in the private sector and, more recently in the public sector (largely because of the endless stream of fiscal stimulus packages). In the 1960s and 1970s high levels of investment, using the large pool of domestic savings, were needed as Japan caught up with high-income countries. But from 1997 to 2001 gross fixed investment accounted for around 27 to 30 percent of current-price GDP, a considerably higher level than in Germany and the United States during the same period.