Notwithstanding its exemplary management practices andgrowing trade surplus, Japan seems to be heading towards a cliff. The invisible hand seems to be altering the rules of the game that the Japanese were adept at and thrived in. Now the question foremost in everyone's mind is will the Japanese mystique squelch the invisible hand that shifts paradigms and redraws the global economic landscape.

Alarm bells ring loud and clear as the Japanese close in on the next millennium. The fiscal 1997-98 does not seem to bode well for its economy. During the year, the nation's corporate profits will register the first fall in the last four years. Current profits at leading non financial firms are widely expected to have fallen by three per cent or more in 1997-98 after a three year run of double-digit growth. Demand is falling rapidly. With the risk of deflation looming large, Japan Inc is not optimistic of any increase in sales. This state of affairs is the vestige of the widely hyped economic miracle in the eighties. The cost of over expansion during the eighties `bubbleera' continue to haunt the corporates. Nikko Research Centre said 74 of the 461 firms or 16 per cent slipped into red. The figure was the highest ever since Nikko started survey in 1996-97. An overwhelming number of companies are revising their estimates downwards. The only redeeming feature seems to be the growth in manufacturing exports fuelled by strong US and European markets and a weak yen. But the domestic sales worsened amidst the economic slump. Japanese consumers feeling the pinch of low wage increases, cut back spending following last year's sales tax rise and increases in medical costs. The dark clouds that have gathered on the business horizon are unlikely to disperse in the near future as the economic slump, asset deflation and a credit crunch continue unabated.

The presage of storm is all pervading across the board in the Japanese economy. The financial sector is in shambles, with bad debts and corporate bankruptcies increasing by the day. The sorry state of affairs of the financial sector hadits genesis in the collapse of stock and land prices earlier this decade.

The slump in the economy is buffeting all the industries. For instance, Honda and Toyota, stand out as remarkable exceptions in the beleagured Japanese auto industry. All three of the country's electrical conglomerates; Hitachi, Toshiba and Misubushi Electric have seen mounting losses in the brutally competitive market. Oil companies primarily in refining and distribution have hitherto been protected by regulation. They are also feeling the pain of deregulation. The steel industry is finding the going tough in the international market due to the declining competitiveness vis-a-vis Korean producers due to weakening Won. The construction industry is in a dismal state. Moody's, a credit-rating agency said in effect that it was unsure whether Japan deserved its top credit rating.

The fiscal and monetary policies abetted over-investment. The interest rates being as low as 0.38 per cent, increased the corporate propensity to invest. Atthe peak, taking advantage of a surging stock market to raise cheap equity linked debt, businesses invested almost 20 per cent of GDP in early 1990. The global slowdown and domestic slump have done little to discourage corporate investments. Corporate sales have doubled since 1980, but debts have tripled. The over investment has also taken place in retailing, where additional shelf space is wasted due to sluggish market.

The corporate bankruptcies have increased job losses, which in turn have increased the number of consumer insolvencies. Over the past five years, more than 100,000 employees have lost their positions because their companies have failed. The credit research firm Teikoku Data Bank Ltd expects the number to increase this year. It is paradoxical, that the country that boasts of one of the highest savings rates in the world is also home to a growing number of individual bankruptcies.

Japan and the US are the mirror images of each other. The US trade deficit moves the Japanese economy. Anyreduction in trade surplus of Japan would result in tremendous job losses. The thumb rule is that for a reduction of every 60 billion dollars of exports, a million jobs are scythed. Hence for Japan to prosper, US should continue to run trade deficits year after year.

The resulting economic earthquake will have its epicentre on the line dividing the US and Japan and reverbrate through the rest of the world. It is imperative for Japan to have an inward pulled economy than an economy hopelessly dependent on exports. The stimulus packages, which do not address the needed structural change in the Japanese policy may temporarily alleviate the symptoms. But the new paradigm would require a change in the Japanese mindset. Given the resilience of the Japanese, they may recognise the realities of the new millennium and get on top again.