As a resident of Japan for 17 years before moving to Hong Kong, I find the story missing a few important points.
Despite Japan's high government debt to GDP ratio, there is still a lot of cash in Japan. Moreover, consumer debt is not nearly as high as other countries. In fact, it is quite difficult to get consumer debt. Housing prices have also risen to the point where market value and mortgages are now back to about where they should be.
Much has also been said about whether the DPJ, who wrested power away from the LDP last year will change anything. Probably not, but there are glimmers of differences. For one, a scandal involving kickbacks to the tune of $400k to an assistant to one of the party leaders isn't taking him down. Not long ago, a few thousand bucks of graft was enough to cause chaos, at least in the press reports. But now it seems everyone is wise to the fact that everyone who was anyone in power was set up with some issue just so that the power brokers had something to use to take down the unruly. The voter isn't buying it anymore. That doesn't excuse what the assistant did, but it certainly isn't causing the government to cave.
(Update: DPJ is denying that there is any issue at all and going after the prosecutors to produce real evidence. Again, more challenge to the traditional powers by the new government. Government popularity has dropped from 71% to 48%, but that's still way better than LDP last several years. . .)
But here's the real point: Japan, Inc. remains terribly inefficient. All it has to do to muddle through (yet again) is to generate that much more productivity or efficiency gain in one a year to keep it all going. In other words, it isn't hard to free up the capital to get through the current fiscal problems. Taxes can stay roughly the same. Unemployment goes up or down a little bit. Civil servants keep their jobs. Salarymen for the most part go to work the next day. Students find work somehow. . .and everybody is happy.
The GDP doesn't grow. Japan doesn't become the #1 economy in the world. But then, nobody really wanted that anyway. If you really want to understand Japan, understand that basically they just want to be left alone.
Take a bath. Have some sake. Mind your manners. And all will be fine.
