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Japan Today

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A short while after I left Japan, I was interviewed on various aspects of the Japanese economy. 

Here are my answers: 


1.  How would you assess Japan's current overall economic situation?

Japan is the original Asian miracle economy, having recovered very rapidly from the ashes and destruction of World War 2, and having experienced very high economic growth until the 1980s.  By the late 1960s, Japan had already overtaken the then West Germany to become the second biggest OECD economy. 

Since the bursting of Japan's financial bubble about twenty years ago, which the government was very slow to address, its economic performance has been mediocre, and it has been battling deflation for many years now.  Its GDP per capita, which rose in PPP terms to 81% of the US level in 1990, has now fallen back to 71%.  On this basis, it is now ranked 24th in the world.        

Since 1990, Japan's economic growth has been substantially supported by government fiscal stimulus, which has resulted in Japan's gross public debt rising to over 200 per cent of GDP.  Japan also has the most rapidly ageing population among the developed OECD countries, which is  dragging down its economic performance.  Last year, Japan was overtaken by China as the world's second biggest economy.  China's population is ten times that of Japan and its GDP per capita one-tenth. 

Nevertheless, Japan remains a very big and strong economy.  It's total GDP is the third highest in the world.  It is the world's fourth biggest exporter.  It has the world's second highest amount of foreign exchange reserves (over $1 trillion), coming after China with its $3 trillion.

The effect of the current crisis on Japan is discussed in the answer to question 6.  
2.  Is Japan a declining economic power?

The rise of emerging economies like the BRICS (Brazil, Russia, India, China and South Africa) automatically means that developed countries like the US, Japan and Germany decline in relative terms.  This is just arithmetic.  This should be interpreted positively in the sense that the success of these countries reflects their adoption of market-oriented policies long employed by Western countries.  The rise of emerging countries has also provided Western countries with new sources of economic growth -- but at the same time, it has provoked structural adjustments in Western countries whose lower skilled manufacturing activities have been the most adversely affected.

At the same time, the relative decline in the size of the Japanese economy is greater than that of the US in part because of its ageing and now declining population.  In addition, while Japan remains an economic giant in the manufacturing industry, it has not become a leading nation in the services industry.  Greater opening up and marketization of the economy would be necessary for it to become a market leader for trade in financial, education, health, tourism, consulting and other services. 

Turning now to politics, Japan has never been able to transform its economic power into a commensurate level of political power, in part because of historical reasons and its Alliance with the United States.  By contrast, the BRICS countries, especially China, seemed to have grown in political power, even though their level of development (measured by GDP per capita) is very much lower than that of Japan.  Japan's political power may have declined more in relative terms than its economic power.

Another dimension of power is what Professor Joseph Nye calls "soft power", that is, the ability to obtain what one wants through co-option and attraction.  Many observers argue that Japan's soft power has been growing thanks to the attractiveness of both its contemporary and traditional cultures.

3. What are in your opinion Japan's major assets and its biggest weaknesses?
Japan has many assets.  It is a very cohesive society with strong values and ethics.  This was immediately evident following the triple disaster of earthquake, tsunami and nuclear power problems where the population remained disciplined, orderly and honest through the very worst of the crisis.  It has a low crime rate, its streets are safe and clean, and it has perhaps the world's best functioning cities. 

Education has always been highly valued by Japanese society, and its population scores highly on international indices of education performance, like the OECD PISA study.  Japanese workers have a very strong work ethic.  The greatest economic strength of Japan is in the development of manufacturing high technology, including for energy efficiency and environmental protection.  Following the triple disaster, the world was reminded of the critical role of Japan in supplying East Asia's production networks and supply chains with high tech components, notably for the electronics, automobile, and semi-conductor industries.

Japan's large manufacturing enterprises like Toyota and Panasonic are also clearly a major assets of the country.  Regrettably, these enterprises are now more successful and profitable in their overseas operations, rather than at home in Japan.  The country's well-known current account surplus is more than fully accounted for by surpluses from the corporate sector.

While Japan's people and enterprises might be the country's strongest assets, governance and politics are its major weakness.  The country has for a long time lacked political leadership.  Infighting between political factions and instability are always on display for the world to see.  These factors mean that the country has difficulty making major policy choices and changes of direction. 

Japan's politics are also weakened by its consensus-based decisioon-making which mean that potential decisions can be postponed forever unless there is a consensus.  A classic example of consensus/paralysis is Japan's decades long discussion of the option of increasing its consumption tax.  This is a measure that this very lowly-taxed country desperately needs to reduce its fiscal deficit, but a consensus to move ahead can never be reached.  Japan shares the same problem as the many debt-ridden democracies, whereby citizens implicitly demand (and politicians deliver) financially unsustainable policies.    

Japan rates very well on some indicators of corruption, like Transparency International Corruption Perceptions Index, where it is ranked the 14th cleanest country in the world, equal with Germany.  But corruption is endemic and systemic in Japanese politics and the corporate world.  This has especially been the case in government relations with the construction industry.  The parachuting of former high-level bureaucrats into industry ("amakudari") is a practice that facilitates close and often shady government/business relations.  Organized crime, the Japanese yakusa, is still very active in political and corporate life, as seems to have been the case in the recent Olympus corporate scandal.

Fundamentally, Japan does not have a culture of openness, transparency and accountability, with corporate and public elites believing that they are above the law.     

4. Do you think Japan is still an interesting and potentially rewarding market?  Where do you see the biggest business opportunities for foreign companies inside the Japanese domestic market?

Japan can be a rewarding market by virtue of its very large size.  It is not however a growing market.  It is also a complex market with quite diverse segments.  Its older population is in general wealthy, and its "silver market" offers many opportunities.  Europe is very well placed to exploit market opportunities for luxury and other products in this area.  Japan's younger population has suffered greatly from 20 years of economic crisis, and is one of the population segments most affected by the rise in "irregular employment", with "freeters" (young people without full-time employment or unemployed) a growing part of this group.  While Japan remains a very important market for luxury goods, there is also a strongly growing non-luxury component in the market.  One general problem that foreign companies will always find in the Japanese market is "cultural conservatism" reflected in an unwillingness to change, experiement or try something new. 

Historically, Western companies have found the Japanese market extremely difficult to enter, and Japan has one of the world's lowest foreign direct investment penetration ratios.  Most international studies show that Japan has many direct and indirect market entry barriers.  That said, there are examples of companies like Ikea which have been very patient in tackling the Japanese market, and have ultimately managed to succeed.  Ikea is a company whose products have a natural asthetic appeal for Japanese consumers.  Another company which has been immensely successful is Apple with its computers, i-Phone and i-Pad which have the attraction of excellence.

5. Do you think Japan is ready to join the Trans Pacific Partnership (TPP) free trade agreement?

Being in desperate need of more external sources of economic growth, Japan needs to join the TPP and other free trade agreements.  This is generally recognized by the Japanese business community which already conducts a major share of its business overseas and is promoting Japanese membership of the TPP.

Joining the TPP would require major adjustments in Japan's trade policy (notably agriculture) and other domestic policies since the TPP covers a vast array of policies like intellectual property, competition policies, etc.  However, lobby groups which would be affected by the TPP are firmly lined up in opposition.

In other words, very strong political leadership would necessary to secure domestic political agreement, and this will be extremely difficult.  One factor which could weigh in favor of Japan's joining the TPP is the fact that the TPP negotiations are being driven by the US, and following recent incidents with China, the US/Japan Alliance is now on a stronger footing than it has been for a very long while.

6.  How have Japan's economic prospects been affected by the triple-crisis?

Immediately following the March 11 disaster, there was a wave of hope that this could provide a positive impulse to Japanese economics, society and politics.  Some thought that political rivals could come together and work for the reconstruction of a new Japan.  Further, there was an outpouring of sympathy from Japan's rivalrous neighbors, especially China and Korea.

In the event, the response by the government and the Tokyo Electric Power Company was sluggish, confused, and non-transparent.  Political infighting quickly resurged, with the hapless Prime Minister Naoto Kan being dismissed in favor of the faceless Prime Minister Noda.  Reconstruction efforts have been slow.  Many affected citizens are still without adequate living facilities.  And at the time of writing, the spread of nuclear contamination only seems to be spreading, and citizens are increasingly unsettled by risks to food security, and more generally by the lack of clarity of what is happening.  On positive aspect of the response to the crisis has been the positive contribution by two of society's underappreciated groups, youth and non-governmental organizations.     

The crisis has excerbated economic weakness, with deflation re-surfacing.  While reconstruction of the crisis-affected areas will provide a filip for the economy, this will not in any way make the economy meaningfully stronger and of course it will add to public debt.  The yen has ironically strengthened, pushing large companies to offshore even more of their production.  On the international front, public support has dwindled for the TPP and possible free trade agreements with countries like Australia.

As Boston University's Bill Grimes recently said, "The fact that even the triple disaster of March 11 was not enough to induce effective cooperation on reconstruction makes me more pessimistic about Japanese government than I have ever been".