By Gideon Rachman 2009-09-02

When the great recession began last year, the fate of Japan was often held up as an awful warning to the west. If the US and the European Union failed to adopt the right policies, it was said, they too might suffer a Japanese-style “lost decade”, followed by years of feeble growth.

Now that the Japanese have used Sunday’s election to elect the Democratic party – breaking with more than 50 years of rule by the Liberal Democratic party – a new western narrative is taking hold. This is a political revolution; it is Japan’s big chance to break with the years of stagnation.

But both these stories are wrong. The Democrats are unlikely to shake things up hugely. Nor should they. For the story of Japan over the past 20 years is by no means as dismal as much western commentary would have it.

It is true that, since its asset-price bubble burst in 1990, the country’s economy has grown slowly, the stock market has slumped and national debt has risen to awesome proportions. But, despite these trials, it has remained a sane, stable, prosperous and exciting country. Politically, culturally and even economically, it offers not so much a warning as an inspiring example of how to deal with a long period of adversity.

The fact that, throughout the years of relative stagnation, the Japanese kept electing the LDP puzzled many outsiders. A few even saw it as evidence that Japan is somehow less than democratic. But it was willing to try and change. The country gave a mandate to Junichiro Koizumi, the flamboyant LDP prime minister, who pushed Japan in a more free-market direction from 2001 to 2006. Now it has turned to Yukio Hatoyama and the Democrats, who are less enamoured of the American model.

However, Japan has always gone for change within well-defined limits. Europeans and Americans worry that a deep recession could stoke political extremism – not without reason, perhaps, given the hysterical tone of politics in the US and the increase in the vote for far-right and far-left parties in Europe. But during almost 20 years of tough times, the Japanese have never flirted with political extremism.

That could be because they have coped much better with economic difficulty than foreigners sometimes acknowledge. The Economist, for example, has occasionally lamented Japan’s “amazing ability to disappoint”. It is true that foreign investors will have found the country’s stock market a particularly disappointing venue in the past two decades; the Nikkei currently stands at a little over 10,500, compared with 39,000 at the peak of the bubble. The Japanese have also been chastised by outsiders for their reluctance to deal more ruthlessly with “zombie” companies, and for clinging to outmoded traditions such as “lifetime employment”.

But the efforts to cushion the worst social effects of an economic downturn have paid off. Last week there were shocked headlines proclaiming that the global recession had driven Japanese unemployment to a new high – 5.7 per cent. That still compares pretty favourably to 9.4 per cent in the US and the euro area. There is probably a lot of disguised unemployment behind the official number – but the same is true in the west.

The Japanese determination to preserve jobs made their labour market less “flexible” and the economy paid a price – but not an unbearable one. The days when academics wrote breathless predictions about “Japan as number one” are long gone. But after 20 years of alleged stagnation, it is still number two – the world’s second largest economy. Its biggest companies still make world-beating products. Toyota, for example, has led the world in developing hybrid cars, such as the Prius.

Tokyo certainly does not feel like the capital of a country in the grip of terminal depression. The city’s restaurants have accumulated more Michelin stars than are to be found in Paris. Tyler Brûlé, the Financial Times style guru, prowls the streets of the city, searching relentlessly for examples of cutting-edge design – a tribute to the country’s reputation for style. When Japan hosted the football World Cup in 2002, just after its “lost decade”, it presented a cheerful and welcoming face to the world that contrasted pleasantly with the spooky nationalism of its South Korean co-hosts. The Japanese can even play football. The national team went to Beijing for the final of the 2004 Asian cup, beat China – and got out of the country alive.

Of course, Japan has its problems. Its average age is rising steadily and its population is shrinking. One in five Japanese is over 65. The Democrats have promised to raise pensions and payments to parents – and to cut taxes. It is hard to see how the sums add up. While the US and the UK worry that their public-sector debts could hit 80 per cent of gross domestic product, Japan’s debt is heading for 200 per cent.

Some of its efforts to deal with an ageing society are positively unnerving. The country has led the world in developing robots as companions for the elderly. These include a “snuggling Ifbot” that, according to press reports, “lives in an astronaut suit, chats about the weather, sings and plays games”.

It is best not to laugh. As the US and Europe struggle to come to terms with the aftermath of a bubble economy, rising public debt and the retirement of the baby-boom generation, they should look to Japan with respect. It may be the future.