Insights Into the Contradictions of the Japanese Economy

Japan, formally known as Nippon, is an island country in East Asia. Ranked third as one of the strongest and largest economies in terms of GDP value, Japan is also one of the most technologically advanced nations. It is a highly developed nation and has a very high standard of living. Japan’s HDI value of 0.915 positioned the nation at 19 out of 189 countries. Japan also has the highest life expectancy as well with an average lifespan of 84 years. It benefits from a skilled workforce and also has one of the highest education rates, reaching an astonishing 98.3% in 2012. This country is renowned for its rich culture and cuisine as well as its popular music industry, anime, video-gaming, etc. Japan has made significant contributions to the advancement of science and modern-day technology. However, like any other economy, all has not been smooth sailing for Japan, with the Japanese economy facing several turbulences through the years.

Japanese economy over the years

Gross Domestic Product, or GDP, measures the market value of all economic activities of a country in a specified period of time. Japan has the third-highest GDP value in the world, preceded by the United States of America and China. Based on projections made by the International Monetary Fund, the GDP of Japan is estimated to be $ 5.36 trillion. The service sector of the Japanese economy is the main contributor, contributing nearly 70% of the total GDP. The service sector covers various activities such as government activities, communication, transport, finance, insurance, etc. Japan’s industry or the manufacturing sector, considered the most highly technical and innovatively advanced in the world, contributes approximately 30% to the domestic product. Major industries include the automotive industry, electronic equipment manufacturing industry, steel, chemicals and textiles industry.

While the Chinese automobile industry produces the largest number of vehicles in the world, Japan closely follows and is to this date considered the most technologically advanced industries. Japan is home to six of the top 20 largest vehicle manufacturing firms, with Toyota topping the list. Honda and Suzuki are also one of the most popular names throughout the world. Japan is the world’s largest electronics manufacturer as well with prominent names like Sony, Casio, Yamaha, Nikon and Panasonic coming out of Japan. The agriculture sector contribution to the total GDP is considerably small at a mere 1%.

From another angle, 60.9% of the GDP is contributed by private consumption. Government consumption and private non-residential investment accounts for 20.5% and 13.4% respectively. Exports are a very significant dimension of the Japanese economy. International trade contributes nearly 16.6% of the total GDP and its major export destinations are the United States, China and Republic of Korea. Major Japanese exports consist of electronic equipment, cars, steel, textiles, etc. Due to lack of natural resources, Japan imports a variety of goods such as mineral fuels, petroleum, and raw materials.

From the year 1960 to 1995, Japan’s GDP had constantly been on the rise, from $44.301 billion in 1960, reaching $5.45 trillion in 1997. However, since the year 1997, the economy has undergone many fluctuations and has witnessed many ups and downs. During the years 2008-18, the nominal value of Japan’s GDP ranged between $4 trillion and $6.5 trillion, with the highest value to date being $6.203 trillion in the year 2012.

After the year 2012, the GDP started continually declining to $5.15 trillion in 2013, $4.85 trillion in 2014 and $4.39 trillion in 2015, after which it started increasing again to $4.94 trillion in the year 2016, only to decline again to $4.87 trillion in 2017. In the years 2014 and 2016, the growth rates were less than that of their previous years and in the years 2009 and 2011, there has actually been negative growth (-5.416% and -0.115% respectively). However, the year 2010 witnessed a sky-high growth rate of 4.192%. Between the years 2012-2018, the growth rate has ranged between 0-2%.

Japan reached the epitome of its success as a nation and achieved the height of progress, growth and development by the second half of the 20th century, around the late 1990’s, but since then, its economy has undergone severe stagnation. These prolonged periods of slow economic growth were triggered by many factors and the effects continue to this day. This, combined with bad policy decisions, has often sent the Japanese economy into recession and drastically reduced the GDP.

A self-induced debt crisis

The first stage of the fall of the Japanese economy was triggered by the decision of the Bank of Japan to sharply raise inter-bank lending rates in late 1989. The reason behind this policy was to deflate speculation and control the inflation in the situation of Japanese asset price bubble, where real estate and stock prices were highly inflated. However, this move proved disastrous, leading to the crash of the stock market and the following debt crisis, where borrowers were unable to pay back their debts. The initial shock escalated to send the economy to a stage which is now called the Lost Decade, which lasted from 1991 to 2000 and was later extended to 2010. The country went through low growth and severe deflation during this time, which still reoccurs once in a while. The stock market was at an all time low and the real estate market has never fully returned to its former glory.
Just as Japan was coming out of the effects of the Lost Decade, on March 11, 2011, an earthquake of magnitude 9.0 as well as a 100-foot tsunami hit the shores of Japan, devastating the economy in four major ways. First, it destroyed the infrastructure of Japan and cost almost $360 billion in damages. The quake hit northeast Japan, from where 6-8% of the country’s total production came from. This took seven years to rebuild and cost a huge amount of money. Second, Japan’s nuclear industry was severely crippled, resulting in a 40% reduction in the country’s electricity. Due to this, Japan was forced to import oil to maintain electricity generation, leading to trade deficits. The last two big effects were in terms of the increase in public debt as well as rising prices and ageing crisis. Japan’s economy is still reeling to come out of this disaster.

The falling trend of the GDP and the growth rate can be attributed to several other factors. A significant aspect of the Japanese economy is its overwhelming public debt situation. Japan has the highest debt to GDP ratio in the world, which is at an astonishing 253%, more than twice its GDP. This creates a very volatile market, open to uncertainty and fluctuations and may hinder the GDP growth of Japan in the long run.

The value of Japan’s yen is constantly changing with respect to other countries currency over the past 30 years and this significantly impacts exports as well as the decision as to where to conduct business and hence affects the GDP of the economy. Over the last 10 years, the value of the Yen has sharply appreciated. At the same time, Japan went from being a low-cost producer to a relatively expensive country. Hence, exporting, building factories overseas and conducting business in foreign countries both stabilised and increased profitability for Japanese firms. While this move did help with trade deficits of Japan, it led to the problem of a hollowed-out economy, as fewer jobs were available in the domestic market.

The costs of an aging population

Japan is considered one of the oldest societies in the world, with a rapidly ageing population. The workforce is shrinking day by day, with over 27.3% of its citizens over the age of 65. Due to this, Japan records some of the longest working hours, with most companies requiring the employees to work more than 80 hours overtime in a month. However, this does not imply higher productivity as according to data provided by OECD Compendium of Productivity Indicators, Japan is said to have the lowest productivity compared to other G-7 nations, hence leading to an insignificant contribution to the GDP.

Another aspect is that as the average age of the population continues to grow, the burden of the Social Security Pension Plan on the GDP continues to increase. The system works in such a way that the current employees pay for the pensions of those who are retired and as the number of working-age employees reduces, the social security benefits are paid out of taxes or public deficits. According to an article in the East Asia Forum, in 2011, total social security benefits amounted to 1000 trillion yen, more than one-fifth of the GDP, however only 60% of these benefits were paid by social security contributions. The remaining was paid out by public deficits. Hence, in this way, deficits in the social security system further intensify public deficit.

The rising age indirectly and frequently leads to contraction of Japan’s GDP with the pension plan being a giant burden on its economy. Prime Minister Shinzo Abe’s pro-growth schemes have made very little progress on this issue.

A budding innovation crisis

While Japan is home to technological giants like Toshiba, Sony and Nintendo, it is important to note that these companies are quite old and the country’s industries have stopped innovating over the past 10-15 years. New businesses are highly rare in Japan and the industrial entrepreneurial rate is a mere 7%, compared to USA’s 20% or higher. This lack of innovation slows the growth of the GDP as business and innovation propel a country’s GDP forward.

To conclude, one cannot deny that while Japan is a highly developed nation in terms of GDP, technology, standard of living, consistency is key in developing in a way that is sustainable. It is very important for any country to consistently grow over time — and Japan seems to be facing many obstacles in this aspect.

Picture Credits:  / Bloomberg

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