The backdrop to Japan's recession: Japan's recession started because of a sharp decline in Japanese exports. But, the decline of exports has slowed down and the manufacturing sector activity has declined sharply, as did imports, which has had a positive effect on GDP. Because of these factors, the negative growth has slowed down. That's why the Bank of Japan says we're near the bottom.

But we have huge potential production activity. Our GDP is much lower, 10 percent lower, than what we can produce. So, still our situation is very bad. The problem is, what will be the engine of recovery?

Japan's growth model: In the 1960s and ‘70s, Japan was like China. We had huge investment potential. When the economy was in bad shape, the BOJ cut interest rates, and we had huge private investment and economic growth increased. But in the 1980s and 1990s we had excess capacity, and huge numbers of workers retiring with a high saving rate. We had too much savings. Japanese demand was scarce, and the main engine came from abroad -- not from domestic factors. From this viewpoint, the recovery probably comes from abroad again.

The demographic concern: Japan's period of excess savings is almost over. The baby boomers born after WWII are now retiring and because they have no income and they need to consume, the savings rate must decline sharply over the next several years. So, we are now close to the exit of excess savings economy. And if that is correct, then domestic consumption will be the engine.

But, Japan has a big pension fund program. It's been hit by the recession. So, Japanese retirees aren't expecting a stable income. They can't consume a lot. Already, the demographic factors, the retirees, have helped bolster the Japanese economy. But it's not clear that they'll be a help through the end of the recession.

How this plays out depends on policy, whether the government boosts the confidence of consumers.

On Japan's exports: Japan mainly produces expensive consumer durable goods like automobiles and investment goods like machines for factories. Fiscal investment has declined all over the world, so Japan's exports -- machines -- sharply declined. And Japan's consumer goods, people do not purchase in this crisis. People aren't going to expensive shops to buy automobiles. The shift of demand from expensive consumer goods to daily cheap products has hurt Japan.

On China's importance to the Japanese economy: In the longer term, China's demand growth is very, very promising. But China is currently stimulating their economy through public investment, mainly public investment. That does not stimulate Japan's exports.

So, in the short term, although china is still keeping rapid economic growth, it is not very promising for Japan. In the longer term, China's middle income class is expanding rapidly and they will consume more and more -- in the long term, it's good news.

On U.S. policy response, versus Japan's lost decade: I think many scholars argue -- of course, we've already known that toxic assets and bad loans have very serious negative effect on the economy. The United States was quick compared with Japan to solve the issue. Japan took more than 10 years to address it. Obama's been more quick. That's very positive.

And the second issue is -- our credit problem was not so serious. I think more important factor was, in the case of Japan, excess saving. Investment opportunities were limited. [Economist Paul] Krugman has pointed out this issue. Japan had a fundamental problem of excess savings in the 1990s. So, not only deflation and bad loans, but also this problem -- the excess saving problem was the key. The U.S., I don't know its economy well. But it doesn't seem like that's a problem!

On the shape of recovery. I think U shaped, not V shaped! I hope it isn't L shaped! But it's going to take a long time. At least until the fall of next year, Japan's economy will be like this.

Kyoji Fukao is a professor at the Institute of Economic Research of Hitotsubashi University in Toyko.