Accumulation of such bad debt inevitably leads to a credit crunch, as banks are strapped for cash and turn wary in their lending practices. Overgeared corporations with outstanding loans in their books were no longer favoured customers, resulting in a collapse of investment and a fall in utilization for lack of long and short-term capital.  In addition, insecure Japanese consumers have chosen to hold back on consumption. The rate of growth of private consumption expenditure had fallen by 2000 to a fourth/third of its 1993/1994 values (Chart 5). In the event, growth decelerated sharply, and periodic recessions became the norm.
 
The point to note in all this is that, with growth having slowed and with the increasing difficulty in showing a profit before interest and tax, firms were unable to meet their past commitments. As a result, the bad loans problem has only aggravated. This explains why huge provisioning against past bad loans by the banking system has not adequately reduced the ratio of non-performing loans. The government has sought to resolve the problem and spur growth, over the last decade, by increasing its own expenditures. With growth, it argued, the performance of firms would improve, making it possible for them to clear at least a part of their debts. Unfortunately, the depth of the slump was such that the government's effort to increase deficit spending, on a budget, which has always been small relative to the size of the Japanese economy, has not worked. Deceleration has persisted despite the fact, noted earlier, of a rising fiscal deficit on the government's budget.
 
It is not only the higher deficit spending formula that has not worked. With the credit crunch created by the bad loans problem seeming to be the proximate explanation for Japan's decline, the argument that a badly designed and managed financial system was responsible for the crisis has gained currency. This amounts to saying that, rather than return to the regime that prevailed before the liberalization of the 1980s, Japan must liberalize its financial sector further, allowing some banks and financial institutions to down their shutters in the process, if necessary. This strategy would only worsen the crisis in the short run, with depositors turning more nervous and intensification of the credit crunch. Yet, Japan is once again surrendering to external pressure and adopting precisely such a strategy. In fact, Prime Minister Koizumi rose to power in 2001 on the slogan that he would reform the Japanese system along these lines. However, the immediate results of whatever he tried were such that he has been unable to proceed any further. Extended reform, to the extent that it has occurred, has not worked either. With the crisis persisting and evidence accumulating that he is not pushing ahead with his reform agenda, even Koizumi's personal political ratings have taken a beating.
 
In practice, the real beneficiaries of further reform in Japan will be the international financial institutions who will be there to pick up the pieces as the system goes bust, so that they can finally play the dominant role in an economy into which they were unable to enter during its miracle growth years. This is likely to be the denouement of this decade-long drama, unless, of course, policies change substantially in Japan. But to expect that of a country which based its earlier miracle growth primarily on an expansion into world markets is perhaps to expect too much.