Last month, we saw the Japanese Yen at a 34-year low, past 160 per dollar. Back in the 1980s, economists discussed when Japan would surpass the US in GDP due to its astronomical growth and technological superiority. Now, 40 years later, we have the answer. Quite the opposite has occurred. Japan has been stagnant for roughly the last 30 years, but why? Why did the country that was meant to be one of the world’s biggest economic powers falter on its way to the top? That’s what we are going to discuss.
After World War II, Japan was in ruins. However, with some initial help from the US combined with expansive monetary, fiscal, and governmental policies, Japan soon began to enjoy a trade surplus. By the 1960s, the world already looked to Japan as a shining example of technological innovation, social equality, and low crime and corruption rates. Fast forward to the 1980s, and Japan's national companies and people had become frighteningly rich, growing too fast. They bought a lot of foreign and domestic property, while their domestic real estate market became so inflated that the Imperial Palace’s land value was at one point estimated to be greater than all the real estate in California. This is known today as a bubble, which burst in the early 1990s. Since then, the Nikkei, the Japanese stock market, has been relatively flat, reflecting the overall economy. It raises the question of why Japan has struggled to recover from this bubble. The rest of the world has experienced inflated economies before and recovered, but why not Japan? There are some popular explanations.
The after-effects of a debt crisis in the 1990s caused Japanese banks and people to restrict their spending for many years. After the bubble burst, many individuals and banks were left with excessive loans, leading to a crisis. People started to spend less as their home values depreciated. Reduced consumption led to fewer investments, and the banks, burdened with too much debt, had less capital available. This initiated a vicious cycle of depreciation that persists in the Japanese economy to this day.
The shrinking population and the elderly wave will offset any prospect of real economic growth in Japan for the next 30 years, until at least the 2050s. Since the 2000s, the Japanese population has been slowly but steadily declining, implying lower long-term growth. Another more brutal problem is the demographics: people over 65 years old make up more than 25% of the population, and by 2050, they will comprise around one-third of the population. Soon, Japan will face the so-called “2025 problem,” when the last of the baby-boom generation from after WWII will turn 75, significantly increasing the strain on the healthcare sector.
In addition, there is the strict Japanese working culture. One illustrative example is the “hiring season.” You are expected to follow a strict plan where you apply for a job once in your lifetime during this specific period. Struggling in school or falling behind for any reason can have devastating effects on your work life and lifetime earnings, especially when business cycles are not in your favour. This results in fewer people contributing to growing social spending, less growth, and further fuels deflation. It is worth mentioning that this policy has been softened in recent years.
The national currency has been volatile. Last month, the Japanese Yen was at a 34-year low. The currency has been consistently rising and falling compared to their trading partners. National companies have struggled to pay workers during times of a strong Yen. Big Japanese companies have moved production to other Asian countries, leaving smaller companies and startups in Japan at a competitive disadvantage. Since banks are less willing to issue loans, there is less capital to pursue innovation. In a world of rapid expansion with iPhones, software development, and AI, Japanese products are being left behind.
They have tried to fix the deflation expectation problems. In 2012, Japanese President Shinzo Abe presented “Abenomics” which contained negative interest rates, deregulations, and hardcore quantitative easing where the Japanese Central Bank today owns roughly 70% of public debt, 15% of corporate debt, and 7% of all publicly listed Japanese companies. Much debt has been appearing on the national balance sheet. Today they have a debt-to-GDP ratio of close to 250% which is significant compared to the Netherlands with 48.6% as of 2019. The Japanese president Shinzo Abe is still in office today, and “Abenomics” is expected to continue. Today, it’s heavily debated if his tactics work because the expectations of the Japanese economy have hardly moved until now. The Bank of Japan has recently raised interest rates slightly and has forecasted interest rate hikes in the near future. This is because these days a turnaround for the Japanese economy is being discussed where we can see real wage growth and thus increased consumption, but also that the ultra-weak Yen can help to push inflation.
Economists have since the fall of the Japanese economy in the 1980s discussed when Japan's breakthrough is going to happen, but it seems to be waiting yet.
They have tried to address the deflation expectations. In 2012, Japanese Prime Minister Shinzo Abe introduced "Abenomics," which included negative interest rates, deregulations, and aggressive quantitative easing. As a result, the Japanese Central Bank now owns roughly 70% of public debt, 15% of corporate debt, and 7% of all publicly listed Japanese companies. This has led to a significant increase in national debt, with a debt-to-GDP ratio close to 250%, compared to the Netherlands' 48.6% as of 2019. Shinzo Abe remains in office, and "Abenomics" is expected to continue. Today, it is heavily debated whether his strategies are effective, as the expectations for the Japanese economy have barely shifted. The Bank of Japan has recently raised interest rates slightly and has forecasted further hikes in the near future. There is currently discussion about a potential turnaround for the Japanese economy, with the possibility of real wage growth and increased consumption, along with the ultra-weak Yen potentially driving inflation.
Since the fall of the Japanese economy in the 1980s, economists have debated when Japan's breakthrough will occur, but it still seems to be on hold.