Since 1990, gross domestic product per capita—the single most important measure of a country’s economic health and standard of living—has grown by a meager 0.6 percent annually in Japan, compared with 1.7 percent annually in the United States. As a result, the gap in GDP per capita between Japan and the United States widened from 10 percent in 1990 to over 20 percent in 1999 (Exhibit 1). Japan’s unemployment rate rose from 2.3 percent in 1990 to 4.9 percent in 2000. In mid-1998, the unemployment rate surpassed that of the United States. Japan’s government, once lauded for its masterful management of the economy, has only exacerbated these problems with futile attempts at a Keynesian stimulus. The country’s debt-to-GDP ratio grew from 60 percent in 1990 to nearly 120 percent in 1999—twice the level of the United States and Germany. In short, the past decade has seen the Japanese economy go from model to muddle.

Yet, as the failed government programs show, the real causes of Japan’s decline are not well understood. In fact, there is a real lack of detailed information about the performance of the Japanese economy at the micro level. To fill this information gap and to...