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Japan economy

Asian hub

Japan’s economy needs another miracle cure. Can it find one? 

Published 21 June 2023 in Asian hub • 5 min read • Audio availableAudio available

Yes, but only if policy changes are implemented to boost mobility, attract fresh talent, and tackle the problems of an aging population.

Many economists have at various points in Japan’s downhill tumble over the last quarter century hollered a view on how to send the economy back to the summit. It was there, after all, in its glory days of rapid and sustained economic growth from 1945 to 1991 – the era of the famed Japanese economic miracle that followed the loss of its mainland conquests. 

Japan is in need of a similar miracle today, with Marcel Thieliant, senior Japan economist at Capital Economics, stating in December: “We think the Japanese economy will enter a recession sometime next year.” 

It’s holding off for now thanks to a post-COVID spurt in household spending and tourism. But Japanese exports dropped by four per cent in the first quarter of 2023, according to Refinitiv, marking a new trend, and manufacturing and industrial production have been almost flat since the end of the pandemic.  

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Substantial risks lie ahead, and they will be all the greater if the global economy slows further. Given that this is as likely as not (given that economic projections are entirely unreliable), business leaders – including Japan’s – should be looking for ways to guard against unforeseen disruptions.  

Japan was a victim of stagflation – persistent high inflation combined with high unemployment and stagnant demand in a country’s economy. It is the same danger we are confronted with in the world economy. Japan’s struggles prove that economic competitiveness is a movable feast made of many parts, involving the private and public sectors alike. 

When I was in Tokyo in April, I had never felt the country to be more trapped. But I prefer to look at causes for optimism – after all, in a post-COVID world, anything is possible.  

The devil lies in the detail 

In the 2022 IMD World Competitiveness Ranking (WCR), Japan was placed 34 out of 63 economies. In 2006, it was 16th – the highest it has been since it entered our rankings in 1997.  

Japanese infrastructure is good (it came 22nd in this pillar). But its public sector is ineffective and its private sector paralyzed, both of which have knock-on effects on economic performance (39th in 2022 and 11th in 2020) and business efficiency (51st in 2022, and in freefall since 2014 – see graph for details).  

Japan has never fostered the productivity of small and medium enterprises and it has weak muscle power in innovation and digital prowess as a result. 

Against a fairly rigid business environment, the widening productivity gap between large enterprises and SMEs has dragged down productivity and performance.  

At the WCC, we advise economies to draw on their strengths. Japan has long been a front-runner in technological developments, but it has taken its eye off the ball. In the auto industry, Toyota and Mitsubishi are struggling to stay relevant in the face of competition from the Chinese. It has also lost its dominance in semiconductors and consumer electronics. 

An unequal, top-heavy society  

Competitiveness is synonymous with quality of life, and Japan’s living standards have steadily eroded. The pandemic exposed systemic inequalities from the past. While all developed countries experience demographic decline, the situation is untenable in Japan. Last year, nearly twice as many people died as were born, and many people who are childless would be thrown into poverty if they started a family. 

With a disproportionately elderly population, a lot of money goes into pensions and upskilling just isn’t a thing. The 55-year-old who has been in the same company his or her entire working life is either not interested in further training or not offered the opportunity. The government is trying to invest in reskilling, but it has a massive amount of debt.  

Japan has come late to the game of attracting foreign talent with the introduction of new visa pathways. An important next step is to eliminate differential treatment between men and women and level opportunities for non-regular workers. 

Radical action is needed if the Japanese economy is to blossom once again

Remarkable trade potential 

In 2022, Japan ranked fourth out of the 30 economies studied in the Hinrich-IMD Sustainable Trade Index – a new addition to our WCC indices, and one which measures how countries balance out the ESG impacts of their global trade actions.

Japan performs best (fourth) in the environmental factor, resulting largely from its high environmental standards in trade. It is the top-performing country in the rankings when it comes to carbon pricing and offsetting by exporting companies. It also ranks 19th out of 162 countries for progress on achieving the SDGs, according to the Sustainable Development Report 2022. Japan’s logistics is rated as excellent and efficient for a country with a strong manufacturing sector, this is encouraging. 

Every year, we ask our global network of partner institutes to list the major competitiveness challenges that their economy faces. In 2022, Japan’s came from the Mitsubishi Research Institute in Tokyo which listed the following: achieve a new form of capitalism based on sustainability and human capital, realize a virtuous cycle of growth and distribution, promote efforts to realize a science and technology nation, resolve the issue of the rapidly aging population, and revitalize rural areas through a vision for a “digital garden city nation”.  

These are low-hanging fruits – a good national strategy and a commitment on all sides of the political spectrum could easily help address them, with the exception of the aging population. A clear policy on talent attraction and employee mobility across industries and borders would, in the long run, reduce the average age of the population. 

Last year, I wrote about Japan’s national strategy in my book The Right Place. While “Abenomics” (the pro-growth economic strategy introduced by Japan’s late prime minister Shinzo Abe) was well formulated, the Japanese have failed to enact it. Political instability, the pandemic, and a lack of national consensus has brought the Abenomics dream to an end.  

Does Japan need a new national strategy, or should it focus on strengthening the sustainability of its current growth model? The data is there for the taking and Japan’s business leaders need to get their hands dirty with it.  

The 2023 IMD World Competitiveness Ranking was published on 20 June. Learn more about this year’s winners and losers and read the full report.

Authors

Arturo Bris - IMD Professor

Arturo Bris

Professor of Finance at IMD

Arturo Bris is Professor of Finance at IMD. Since January 2014, he has led the world-renowned IMD World Competitiveness Center. At IMD, Bris directs the Strategic Finance and Navigating Fintech Innovation and Disruption programs. He also previously directed the flagship Advanced Strategic Management program between 2009 and 2013.

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