The Fading Economy of Japan
Japan, famously known as ‘the land of the rising sun’ and infamously as ‘the fading economy’ is a place of traditional arts, tea ceremonies, calligraphy, and a dozen UNESCO world heritage sites and not to mention, the birthplace of Sushi. Japan is an island country and its location in the ring of fire makes it prone to many natural disasters. Japan ranks in the top 10 in Global Peace Index and is the third-largest country in terms of Gross Domestic Product. It ranks 29th on the Ease of doing business index and 5th on the Global Competitiveness Index. It ranks first in the world in the Economic Complexity Index, which aims to highlight the use of innovation and practical knowledge in an economy. It has the world’s largest electronic goods industry and third largest automobile manufacturing country. In 2017, 51 of the Fortune Global 500 companies were based in Japan. So how did a country which had lost so much in the infamous Nuclear attack of 1945, in World War II; numerous earthquakes and natural disasters become one of the wealthiest nations of the world? More importantly, if it is indeed so rich why is it being called ‘a fading economy’?
Analyzing the economy of a nation over a period of time involves a comprehensive study of their GDP, unemployment rates, inflation trends, political instability, and other relevant macroeconomic variables. At the same time, it is imperative to understand that the economy of a country is influenced by geopolitics, demographics, natural disasters, and global events as well. Through this article, I aim to highlight the economic situation of Japan’s past and future prospects as well as draw attention to the influence of geopolitics on the economy of a nation.
But, I will try to keep things fairly simple here by not getting into data-driven details of these variables and focusing more on how and why things happened.
ECONOMIC HISTORY OF JAPAN
The current financial situation of any country dates back to its foundations so we’ll try to delve into the economic history of Japan, the Meiji Restoration of 1868 reinstalled the imperial government in Japan and made it a centralized nation without a Shogunate (military government)After this revolution, the Japanese economy was opened up to western culture, education system, and industrialization. The Meiji regime also saw an end to the feudal system, the set up of a new and more western constitution, and the formation of Labour Unions. But they still aimed at improving the military capabilities and economy to an extent that they have no foreign dependence, which they later successfully achieved. The Meiji government wanted to set up an empire and annex countries like Korea and surrounding islands, their only threat here was China which later also led to the Sino- Japanese war which Japan won. Later by 1910, Japan had captured Korea, parts of Russia, and China, had won the Russo-Japanese War, and been an active member in the alliance against the Boxer Rebellion in China. Even though Japan was showing its capabilities through various means, the western nations never considered Japan equal to them.
Britain and Japan allied at this time and soon World War 1 broke out, Japan was still on a mission to capture more islands in the southeast Asian regions, and apparently, they belonged to Germany, which gave them more incentive to annex them since Germany and Britain were on different sides of the conflict. So, they did conquer the German islands and soon after that, the allies won WW1. Japan, as a victor, became a part of the League of Nations, the organisation created to maintain peace and stability all around the globe. However, they didn’t stay there for long and betrayed the organisation’s ideals by capturing part of China called Manchuria. They went on to ally with Germany and Italy, due to their similar imperialistic ideologies, which also led to Japan’s involvement in World War 2. Japan saw the United States of America as a threat to them in their mission to annex regions of Southeast Asia. It was 1941 when Pearl Harbour, a major US military base, was attacked by the Japanese Military, which forced the United States to join the war. It was later proved to be a major mistake for the Japanese as Americans had overwhelming technological superiority, which also involved the development of the nuclear weaponry used to destroy two Japanese cities - Hiroshima and Nagasaki.
POST WORLD WAR II JAPAN
Seeing the mass destruction caused in Japan after WWII, foreign aid was provided to Japan for infrastructural development and modernization. This proved to be the period now known as the ‘Japanese Economic Miracle’. Japan saw immense economic growth from 1947- 1991. Tokyo became the first Asian city to witness an economic growth of 9-10% annually. It became a modern Asian country with sustained economic growth, it was doing exceedingly well in sectors like automobile, consumer electronics; it was a low-cost manufacturer and exporter to countries like the US. Japan also became the world's largest creditor. People became wealthy, new job opportunities opened up, domestic demand increased and the government aggressively promoted the idea of investment among the townspeople. All this in barely three decades after WWII, where Japan had lost all its infrastructure and wealth. It went from a war-torn nation to an industrial and financial powerhouse. Japanese manufacturing companies were a benchmark and it was predicted that the Japanese economy would overthrow the US economy in a few years.
But why didn’t that happen?
THE LOST DECADE
In the 1990s Japan went through an economic and financial crisis from which it has still not fully recovered, with a national debt of 12 trillion dollars which is approximately two and a half times the GDP of the nation, not to mention the interest payments on this debt.
What happened? The biggest bubbles in the history of the financial crisis.
The period from 1991 to 2001 is known as the ‘Lost Decade’ for Japan because it was a period of the extensive slowdown of Japan’s bustling economy. It's worth mentioning that even though Japan’s economy is one of the largest in the world, it hasn’t seen any growth in the past years, instead, it's facing deflation and the debt is increasing.
Let’s go back to 1985 and try to find out how this bubble started. In the early 1980s,
The US dollar appreciated by 50% with respect to the Japanese yen. This made US exports expensive and imports cheaper, they bought a lot and sold less which caused a trade deficit that grew to 3.5% of the US GDP. This resulted in a debt crisis in The US, which still exists (The national debt of the US is 27 trillion dollars). In 1985, The US called for the Plaza Accord which was signed by Japan, the US, and some European countries. It was decided to depreciate the U.S. dollar in relation to the Japanese yen so that the US could sell in other countries profitably. They started selling the US dollar and this put a halt on the Japanese export machine because the US was Japan’s largest consumer.
The Bank of Japan and the government were afraid that such a devaluation of the dollar would lead to adverse effects on the competitiveness of the Japanese industry.
They decided to do two things - increasing domestic demand and implementing expansionary monetary policy to compensate for the loss of value of the US dollar since they would be losing a considerable amount of revenue. So, interest rates were reduced by almost 50%, the government increased public spending, banks lent enormous sums of money to companies and households so that they could launch themselves into the real estate and capital markets. This led to a sharp increase in the prices of real estate which in turn increased their value as collateral; therefore increasing the borrowing capacity of people. The fixed income (which they received by investing) of people was declining which led them to invest more in the stock market and real estate, the bubble was being fed!
Business Speculations by big companies added to the bubble, they borrowed money to finance the purchase of shares, which would increase the share price and hence their profits. People tried to reason this out by saying that the tech companies of Japan had a lot of potential hence the share prices were increasing.
In reality, however, the companies were not making any profits.
The rapid rise in the wealth of Japanese people didn’t seem justifiable anymore, company debt was increasing but so was the stock market. The central bank decided to slow down the expansionary monetary policy and the bubble burst! Prices plummeted and people lost all their wealth, big companies started selling large numbers of stocks and borrowers didn’t have the money to pay back the interest.
DEFLATION AND STAGNATION
Since the bubble burst, Japan has seen a fairly stagnant economy, it one of the largest economies but it has negligible growth. In a desperate attempt to increase consumer spending and demand the government reduced the interest rates and increased government spending again but growth in wages is so stagnant that the price level is not increasing and the economy is experiencing deflation. This is causing people to hold onto their money.
The government had even printed double the amount of money to fight deflation in 2013, to curb deflation. But, fiscal policies don’t seem to be working well for Japan. This is because the government is spending a lot of money to increase consumption but not making enough money, so it is going into debt. Even though debt in the form of bonds has low-interest rates, borrowing is so high that interest payments become very high.
Now, the situation has worsened as even though the Japanese industries are very efficient, they are facing intense competition from other south Asian countries like South Korea, China, Vietnam, etc.
Demographic changes in Japan have also added to the stagnation of economic growth. Since the past decade, Japan has experienced a low birth rate and high life expectancy due to which the ratio of the workforce to retired individuals has declined. The young population of Japan is working to help the older generation sustain themselves directly or indirectly. Public and private wealth is being used to take care of the elderly population.
The government has declared a Social revolution to fight the problem of a small working population and demographic ageing. They aimed at increasing labour productivity and investments in the tech sector. This was majorly done by keeping less demanding jobs so that older people could also work. They encouraged female labor participation by making business places safe and providing part-time contracts. This is why Japan has the highest number of working females. They are also constantly trying to bring in immigrants who can increase the working population of Japan.
The Japanese example of stagnation questions our assumptions of a constantly growing economic system. It is also believed that China might get ahead of the US in the near future, however, what might seem likely now could be easily disrupted by one small act.
Written by Swati Bisht; edited by Alexey Dudarev
