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The Land of the Rising Sun is in the midst of a devastating deflationary cycle. While politicians here are worried about inflating our way out of the crisis, those in Japan are under a different strain. Prices fell 2% in December. Core deflation was 1.2%. This is the biggest decline in the history of Japan.

How can a country that has 5% unemployment be struggling with an economic disaster? It is easy. The government meddled in the economy for decades, and they have been paying the price ever since. Look no further than the Japan Airlines (OTC:JALSF) debacle to see the price a country pays for economic stupidity.

Some point out that this is not all the government's fault. As the WSJ put it yesterday:

Granted, part of Japan's woes are beyond Tokyo's control—particularly to the extent a yen floating ever higher on a sea of Bernanke greenbacks contributes to deflationary pressure. Exports, the bright spot during the deflation sparked by the financial-bubble collapse in the 1990s, are once again picking up. But that boost may not be sustainable, given America's recovery remains tentative and China is trying to rein in its stimulus."

This is a fair point. But, it doesn't explain the whole story. The Japanese economy is in danger of falling apart. As the WSJ ended yesterday:

If he [the new Prime Minister] doesn't start delivering some shock and awe soon, Japan risks sinking even deeper into malaise."

What does this mean for investors? Although the election of a new government looked slightly promising, I wouldn't want to invest in Japan right now. Malaysia (ETF symbol: EWM), still looks like the most attractive play in Asia. For those inclined to get short exposure to Japan, EWV is an interesting ETF, but please note, it is levered short.

Disclosure: No positions

Disclosure: None