After years of economic stagnation, Japan may finally be on the mend. Prime Minister Junichiro Koizumi won a landslide election victory earlier this week. His win can certainly be seen as a mandate for economic reform in Japan – and also as a boon for the world economy.

Japan is the world’s second largest economy – after the U.S. But looking at Japan’s economic performance over the last 15 years, one would wonder why Japan has not sunk into the sea.

Remember "Japan, Inc.", the envy of American corporate bosses? Remember when many Americans were afraid that prime property in U.S. downtowns and golf courses would all be bought by Japanese? That was then (1970 - 1990), when Japanese corporations seemed unstoppable and the country's stock market tripled in a 20-year period.

Japan's Nikkei 225 Index (stock market proxy) peaked at 40,000 in 1989 and has been in a downward spiral until 2003, when it finally got above the 10,000 level. So what happened to Japan, Inc.?

The Japanese were doing a lot of good things, business-wise, from 1960 through 1980. Their post-war constitution limited defense spending, so government monies were used by-and-large for economic growth. The Japanese embraced new technologies (like industrial mechanization) and placed great emphasis on quality control and cost controls. They were able to take advantage of America's economic decline in the 70's. At that time, many U.S. corporations lost sight of quality control. High-quality Japanese products flooded the world's markets. Japan's economy became the world's second largest, with the U.S. in first place.

During the 80's, Japan's economy ballooned into a bubble, somewhat like America's in the 1990's. Many Japanese bid real estate and stock prices up to unsustainable levels. The bubble burst in 1989. Since then, the Land of the Rising Sun's economy has been stagnant, suffering four recessions just in the 90's. But there was a lot more to Japan's economic collapse than just high property and stock prices.

Government and business got too cozy during Japan's heyday. The lines between public policy and corporate governance became blurred. Government made a lot of decisions based on good 'ol boy connections. Too many large corporations also became intertwined -- so much so that they held large equity stakes in each other's companies (this practice is known as "cross-shareholdings"). As stock prices plummeted, company assets shrunk. Since most everyone was holding everyone else's stocks, most companies' balance sheets became very unhealthy.

Companies were too heavily shielded from competition and got soft (and rotten to the core). Middle management became over-bloated and too comfortable. Japanese banks held massive stakes in real estate and stocks. As asset values fell, bank balance sheets fell to pieces. Bank lending, a primary fuel for economic growth, evaporated. This spiral has continued for almost 13 years. Unemployment has reached levels many Japanese are unaccustomed to.

The end result was that bad companies were propped up by competitors and/or government. Government's remedy for economic stagnation has been to borrow huge sums of money and pour it into so-called public works projects.

Koizumi was first elected prime minister in April of 2001. His platform was high on populist and reformist talk, but vague on details. One of his first endeavors was to clean up Japan’s horrible banking mess. But he started “reforms” at a very slow pace – partially because the country is glacial by nature, but also because of opposition from good old boys in his own party. In fact, he called this week’s elections precisely because of his own party’s “rebels.”

A keystone in Koizumi’s current efforts is to unlock the $3 trillion held by Japan’s postal service:

Prime Minister Junichiro Koizumi is pushing hard for the reformation of Japan Post, which holds about $2.9 trillion in savings and insurance deposits, making it for all practical purposes the world's biggest bank. How did Japan's postal service get so rich?

Postal savings accounts. For 130 years, the postal system has served as a local savings bank for anyone with a cent to spare.

These postal savings accounts are pretty secure, and probably assuage the fears of typically conservative Japanese grannies and grandpas. But Japanese investors could do better stuffing their money into mattresses, burying it in a coffee can in the back yard, etc.

Japanese companies need fresh, local investments. The people need to own pieces of these companies and be noisy shareholders. The postal savings accounts could help accomplish these goals – and make Japanese investors more money.

Japan’s economy has been slowly recovering, especially over the last few years. According to CNN Money:

Revised data Monday showed gross domestic product (GDP) rose 0.8 percent in April-June in real price-adjusted terms, beating both the initial reading for a 0.3 percent increase and economists' consensus forecast of a 0.4 percent rise.

The third straight quarter of expansion was buoyed by strong corporate investment and private consumption, as well as a rebound in exports. …

On an annualized basis, GDP expanded 3.3 percent, much stronger than an initial estimate of a 1.1 percent rise and economists' median forecast of a 1.5 percent gain and putting Japan on a par with U.S. economic growth during the same period.

The healthy growth figures and Koizumi's stunning election victory on Sunday helped Tokyo's Nikkei share average finish above 12,850 for the first time since 2001 Monday.

As Japan is the “United States' largest non-NAFTA trading partner,” Koizumi's reforms are only good news for Americans, many of whom will be affected by the after-shocks of Hurricane Katrina.

As the Japanese economy strengthens, so will its trading partners, especially the U.S., Europe, and southeast Asia. I have been investing in Japan for 10 years. If I would have been short-sighted, I would have pulled my money out long ago. For those who had written off Japan, one word of caution: Yes, Japan may be somewhat glacial in its national thinking, but do not underestimate the Land of the Rising Sun. And one other thing: Buy low, sell high.