In the last quarter, Japan's gross domestic product shrank 0.9 percent and industrial production is down 8 percent. Its flagship car manufacturer, Toyota, has announced another of now routine mass recalls of its vehicles.
And Japan's once flagship electronics giants are floundering. Sharp is forecasting more than $5 billion in losses this year, Panasonic is shedding 10,000 jobs and Sony's stock hit a 30-year low as the company scrambled to raise $2 billion in new cash.
Some of these problems can be attributed to the crisis in Japan's relations with China, triggered by a territorial dispute over the Senkaku Islands, followed by boycotts of Japanese goods. The underlying crisis, however, is far more serious.
Japan is the most indebted nation on Earth, with debt above 225 percent of GDP. This year's budget deficit will be at least $480 billion. Despite interest rates running at almost zero, Japan has been able to finance its gargantuan debt because Japanese savers loyally buy it.
But how long can they afford to do so? Japanese used to be among the world's most thrifty savers. But over the last five years household savings are running at less than 2 percent of disposable income, less than half the already low U.S. level.
Traditionally, Japan has been able to finance its debt because of its massive trade surpluses from its formidable export machine and from interest payments on Japan's investments overseas. But both of those sources of funds are drying up.
Trade surpluses have been eroded by the weakness of Japan's electronics giants and even more by the impact of last year's tsunami and the nuclear disaster that followed. By closing its nuclear power stations, Japan was forced to spend $5 billion a month importing oil and gas from overseas.
So Japan is now running a trade deficit. For the first half of fiscal 2012 through September, Japan logged about $40.6 billion in goods trade deficit, up 90 percent from a year earlier and the biggest since the Finance Ministry began recording in 1979. In September alone the deficit topped $7 billion, the third consecutive month of red ink.
The question therefore arises; how does Japan finance its budget deficits and its debt in the future?
It could raise interest rates but that would mean paying ever more to finance the budget deficit.
It could print money but it has been doing that for some time and hitherto the currency markets haven't reacted by downgrading the yen or not by very much.
This may be changing. The yen recovered slightly Friday but only after posting its worst weekly performance against the dollar since mid-February as the markets expected some aggressive monetary easing from the Bank of Japan. But the yen is still trading at just more than 80 to the dollar. By historical terns, it is still priced high against the U.S. dollar. Thirty years ago, it was 250 yen to the dollar and it was more than 100 to the dollar in 2008.
Something has to give. Either the yen weakens sharply or the government slashes spending and cuts the deficit or Japan has to raise its interest rates.
Each of these options carries serious problems for the global economy and very dangerous challenges indeed for Japan. And now comes a general election, which looks likely to return the Liberal Democratic Party led by Shinzo Abe to power.
The Liberal Democrats aren't natural reformers. In his last undistinguished turn as prime minister, Abe was a short-lived failure. His departure paved the way for the landslide victory of Yoshihiko Noda's Democratic Party, whose promise of reform were derailed by the tsunami as well as by corporate Japan's lackluster performance.
Japan's is still the world's third-largest economy after the U.S. and China, despite over twenty years of anemic growth after the bursting of its property bubble in 1990. But Japan is also the world's fastest-aging society, facing a steadily increasing challenge to finance the pensions and healthcare of its elderly. By 2050, half of the population will be over the age of 60.
With more than 16 million women and 12 million males above the age of 65, Japan has fewer than 6 million infants under the age of 5. Indeed, there are today more Japanese over the age of 80 than under the age of 5.
In terms of aging, much of the rest of the world is steadily following in Japan's footsteps. With luck, other societies will learn from Japan's example in how not to run an economy when the demographic trends are so daunting. As of now, unless corporate Japan can find a new lease of exporting life, or the country returns to reliance on nuclear power, it is not easy to see any alternative but a sharp devaluation of the yen, eye-watering rises in interest rates or dramatic spending cuts.
Japan may even need all three of these at once.
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