A positive factor for Japan (though not for resource-rich countries like Australia) has been a decline in the price of commodities, including crude oil and iron ore, towards the latter half of 2008. This drop in resource prices, together with an appreciation of the currency, is certainly a huge plus for the Japanese economy, which is a large net importer of resources.

On balance,however, Japan’s economy has suffered a great deal from the world economic stagnation in 2008.

The challenge for Japan in 2009 is finding a way to stop the slide in its sharply deteriorating economy. A much more active fiscal policy is needed, given the current economic conditions, but this would mean further accumulation of government debt, which is already at a critical level of more than 180 per cent of GDP: level of debt that is one of the very worst in the world.

It seems like what is now required to rescue Japan’s highly depressed economy is a radical shift of its strategic economic policy: from one based on neo-conservative economics and the philosophy of small government to one based on Keynesianism and welfare state ideology.

This paradigm shift appears inevitable not only in Japan but in many other countries, after more than 30 years of market fundamentalism being dominant and classical doctrines against government intervention holding firm.

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Iwao Nakatani is one of Japan’s foremost economic analysts and was formerly Chairman of Sony. He has had a distinguished academic career at Harvard, Osaka and Hitotsubashi Universities and is now Dean of the Renaissance Centre of Tama University in Tokyo.

This is part of the special feature: Reflections on developments in Asia in 2008 and the year ahead