Rethinking the Japanese economy
After 30 years of stagnation, Japan’s stock market surge hints at a possible economic revival.
In a nutshell
- Demographic decline and low consumer spending have held back growth
- However, recent market trends could signal an upturn
- The weak yen will likely boost investments and benefit the government
For much of the 1970s and 1980s, experts predicted that Japan would eventually surpass the United States as global hegemon, and that Japanese society pointed to the future of the industrialized world. Then came the shock of late 1989, when the speculative bubbles on the stock market and in the real estate market burst. Decades of stagnation followed.
Many observers assumed that Japan would keep declining at the same slow but steady rate. However, looking back at the past four decades, it is evident that there were positive developments, too. Large Japanese companies kept their pole position in the domestic market as well as on the global scene even as the Japanese economy stagnated. Now, a few data points indicate that the macroeconomic trend is changing too. Most notably, a recent bull run at the Tokyo stock market has lifted investors’ spirits.
The benefits of a weak yen
The weak yen – which hit a 34-year low this year – means several of the listed companies in Japan are undervalued. The Japanese government and monetary authorities have accepted a substantial devaluation of the national currency. This decision was made because a weak yen has several benefits. It fills the coffers of the Japanese companies that produce and sell abroad. There is more money around to satisfy shareholders. It also increases Japan’s attractiveness to tourists, helping an important sector of the economy that had been severely battered by the Covid-19 pandemic.
Of course, a weaker yen also makes imported goods more expensive and leads to a high current account deficit – especially because resource-poor Japan must import most of its energy. A softer yen also causes an inflationary uptick, but this is currently in line with the government’s target inflation rate of 2 percent.
During the last quarter of 2023 and the first quarter of 2024, Japan narrowly avoided sliding into recession. Gross domestic product (GDP) growth continues to be weak and vulnerable. The main structural hurdle for strong and sustainable growth is Japan’s rapidly shrinking and aging population. A second obstacle is persistently slow salary growth for a large swath of the working population, which counteracts the government’s efforts to increase consumer spending. Finally, there is the general disposition of the Japanese population. Ever since the deflationary crisis of the 1990s, people have been reluctant to spend, which in turn dampens GDP growth. In global GDP rankings, Japan has recently slid back behind Germany to position number four.
The China factor
Still, there are several factors that are currently having a positive impact on the Japanese economy. The weak yen not only helps corporate profits, it also makes assets in Japan relatively cheap, particularly for foreign investors.
Meanwhile, China – Japan’s largest trade partner – has been struggling with serious structural economic difficulties for some time. Many of the reforms that Beijing could implement to come out of its rut, such as an independent judicial system, transparency and corporate governance, are not applicable, because they clash with the very nature of a totalitarian one-party system.
More on Japan
- East Asia realignment: Japan and the Philippines move closer
- Once again, Pacific security is Japan’s priority
Assets in Japan are attractive to the wealthy Chinese, not only because they are currently very cheap, but also because they are safe. There is a growing demand for Japanese real estate. After the Covid-19 pandemic, tourism in Japan is rebounding spectacularly. The Chinese are back in great numbers, often investing in small hotels or holiday apartments. Japanese real estate is also prized because owning it can help obtain permanent residence in the country – a prospect all the more appealing to Chinese citizens as their country becomes increasingly authoritarian.
Japan is especially popular with wealthy Hong Kong investors. The climate in the former British colony has clearly deteriorated and the freedoms and security of former times have been sacrificed on the altar of Chinese sovereignty and compulsory patriotism. Many in Hong Kong are looking for real estate overseas.
Scenarios
An open war around Taiwan, clashes between China and Japan in the East China Sea or a war on the Korean Peninsula would all have devastating effects on the Japanese economy. From the Japanese point of view, these conflicts would be even more damaging if former President Donald Trump were to return to the White House, and if nationalist and isolationist voices gain strength in the next Congressional elections. If this happens, Japan will likely face both economic and geopolitical pressures.
The substantial geopolitical developments since the outbreak of the war in Ukraine have affected the Japanese government. Tokyo is aware that the world is in a new phase of aggressive militarism, in which defense and deterrence play a key role. Already during Shinzo Abe’s second term (2012-2014), plans had been made to reduce dependence on the U.S. by spending more on national defense to build a stronger defense industry.
Most likely: Continuation of current policies
This scenario anticipates Japan maintaining its existing economic strategies. The government would capitalize on macroeconomic benefits derived from the weak yen, reinforcing the monetary and fiscal policies it has followed in recent years. The stability of this scenario hinges on the current government remaining in power. Under Prime Minister Fumio Kishida’s steady leadership, with no evident alternatives to his Liberal Democratic Party (LDP) government, this path appears highly probable.
Moderately likely: Economic and structural reforms
In this scenario, Japan undertakes significant reforms, including the liberalization of entrenched structures that currently distort markets. This would foster a more competitive environment, improving corporate efficiency and profitability. The political space for such reforms exists, supported by Japan’s unique social contract. The population would likely be prepared to endure some hardships if necessary for fiscal and structural consolidation.
Least likely: Comprehensive overhaul
This scenario represents the most extensive and long-term challenge for Japan, involving fundamental societal reforms particularly concerning demographics and labor market structures. It questions the very nature of Japan’s traditional social contract. The scenario suggests a future where Japan might need to drastically open its labor market, leading to a more diverse society and a significant repositioning in the global economy. This would constitute a profound transformation of Japan’s national identity and global role.
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