The Japanese economic miracle of the 1980s has now been categorically confined to the pages of history and has been replaced by notions of economic mismanagement and political ineptitude.

Political developments of recent times are almost comical to watch, with the election of a prime minister whose popularity is already rock bottom before the chair is even warm and the appointment of a finance minister who only took the job because nobody else wanted it.

This reluctance to take the second most powerful role in a country which is the world's second biggest economic power is not too surprising because nobody in their right mind would feel too comfortable running with such a poisoned chalice.

The upshot of the comedy of errors is that the country is now back where it started and it is difficult to muster up sufficient enthusiasm to provide any sort of a positive economic prognosis going forward. The only source of light derives from a view that when one is at the bottom of the barrel, the only way is up.

In understanding what is going on at the moment, one has to delve into a little bit of history. The Japanese economy in the 1980s appeared like a tremen dously successful model which others were trying to copy. But it turned out to be a classic example of a bubble economy, where loose credit and excessive animal spirits drove property and stock prices to exorbitant levels.

Eventually the monetary authorities were forced to prick the bubble. Unfortunately, as is the nature of such bubbles, this proved a very painful process and the legacy has been almost a decade of recessionary economic conditions and a banking sector which is burdened with bad debts.

The nature of the political system has rendered it impossible to address these issues in any meaningful way and indeed there would appear to have been a basic reluctance to face up to the extent of the problems.

In recent Upper House elections, the ruling LDP party was trounced, forcing the resignation of Prime Minister Hashimoto. He has been replaced by Keizo Obuchi who came from the same faction within the LDP party, which incidentally is the largest and most powerful one.

This appointment has not been taken well by the Japanese because he is seen to be a chip off the same block as Hashimoto and does not promise the sort of radical approach which the country needs.

Mr Obuchi then sought to appoint a finance minister and ended up with an individual in his late 70s Mr Kiichi Miyazawa.

Although he is regarded as a bit of a maverick, his credentials are not overly reassuring. He was twice removed from office amid allegations of corruption, his memory is reputed to be less than sharp, and his age may prevent him from flying to G7 meetings.

Mr Miyazawa's performance since his appointment has been less than impressive. In a late night interview, which is alleged to have been conducted from the back seat of a taxi, he ruled out the need for intervention to influence the yen or the stock market. The markets took him at his word and the currency fell heavily. He later retracted and at this stage is about to embark on his second run around the circle.

This is not reassuring and certainly one would be justified in fearing that nothing much will change under the new administration. The situation in regard to the magnitude and nature of tax cuts is changing by the hour, while the status of the earlier proposals to address the bad debt problems of the banking sector is not at all clear at this stage.

In order to take the economy out of its current downward spiral, a number of key areas have to be addressed in a serious and radical manner. Significant and permanent tax cuts are needed, but the problem is that these tax cuts could well end up boosting an already large pool of savings because there is no guarantee that the depressed consumers will actually spend the proceeds.

Statistics were released this week which showed that household spending fell by 3.1 per cent in the first half of the year, the sharpest fall since 1963. In an environment where companies are failing and unemployment rising, tax cuts are unlikely to do much to consumer confidence.

Apart from the issue of job security, there is also a serious pension crisis as the ageing problem hits the pension system.

Many workers now realise that they may not be guaranteed a pension when they eventually retire, so saving now gets a higher priority than spending.

In regard to the banking system, it is clear that for an economy to function properly a sound and efficient banking system is a basic pre-requisite. This is certainly not the case in Japan where nobody is too sure just how large the bad debt problem is. This issue needs to be clarified and those banks which are not solvent must be left go to the wall.

These are all serious structural problems which must be addressed, but will take time and considerable pain. The problem is that it is far from certain that the political will is sufficient to tackle the issues head on. Meanwhile, economic solvency will have to depend on a weak currency, but the problem here is that further yen weakness will threaten the rest of Asia and particularly China.

There are no easy answers, but one can confidently predict that Japan will be an under performer and a drag on world economic activity for the foreseeable future.

Jim Power is Chief Economist at Bank of Ireland Group Treasury.