Opinion & Analysis

Japan's Economy On the Rise

What is going on with Japan`s economy?  As Tokyo-based Philip Turner reports, there are signs of radical change - but the same old politics is in the way

 Take a walk around the streets, subways and bars of Tokyo this week and you will see, amid the heat, sweat and packed crowds, adverts offering higher hourly wages for staff, career changes for skilled workers, and brand new tower apartment blocks for the middle class.  You will also see lots of foreigners.

 Inflation is higher than in the US; house prices in main cities are skyrocketing; and wages are rising for the first time in 30 years.  What is going on with the Japanese economy?

This is not the Japan we have become used to.  Thirty years ago Japan was the poster-child of post-modern economic failure, a lesson in how the world`s most successful economy could suddenly stagnate.

Japan confronted a combination of problems to which policy-makers had no answers: a stock and real estate collapse triggering persistent deflation, excess debt and low growth - just as Japan became the wealthiest country in the world.

 Other countries, particularly China, are now starting to encounter similar problems.  As they do so, Japan`s own economic  performance is being re-evaluated. 

Phil: Turner's Tokyo neighbourhood / image supplied.

Nobel Prize-winning economist Paul Krugman last month described Japan as a role model for managing a declining population while remaining prosperous and socially stable.   Still the world`s third-largest economy, Japan has the world`s longest life expectancy and scores among the highest in the world on the World Bank`s Human Capital Index, above the US.  

As the Nadeshiko are reminding us, Japan is even good at football.

Japan remains an asset superpower.  It has been quietly investing much of its wealth offshore, including down under.  Mitsui is now the largest tax-payer in Australia.  In New Zealand Dai-ichi Life Holdings paid close to NZ$1 billion last year to acquire start-up insurer Partners Life – a company most Kiwis had probably not heard of.

Just as scholars are reappraising Japan`s historical success, signs have emerged that its economic model may be radically changing.

Inflation is now at 3.3%.  While still below the level of NZ and most western countries, that is above the US headline rate, and the highest since the 1980s.  It offers the prospect of a permanent exit from the debilitating deflation that has depressed Japan since the 1990s. 

 Some of this inflation is imported, reflecting the yen falling to its lowest level since 1998. 

 The cheap yen has in turn driven foreign demand for Japanese assets.  

 The Tokyo stock market has risen 27% so far this year.

 Tokyo apartment prices are up 28% since 2020.

Deflation has been a crushing burden on economic growth as investors and consumers alike held back on spending for fear that tomorrow's assets would be worth less than today's  cash.  One newspaper reported that one property owner had stored billions of yen notes in boxes and allowed it to grow mold rather than put it in a bank.

Deflation in turn forced Japan`s monetary authorities to launch the then-radical policy of massive quantitative easing through huge purchases of government bonds and negative interest rates.

On July 28, the Bank of Japan took a tentative step towards unwinding that policy, raising the ceiling for 10-year government bond yields to 1.0%.  This does not amount (yet) to removing negative interest rates, but it shows the Bank is thinking hard about doing so, if inflation stays above its target of 2%.

Japan`s long-suffering workers have barely seen any increase in salaries in 20 years.  That appears to be changing, with wages in 2022 rising 4.8%, the fastest since the 1990s. 

A Government panel last month recommended a 4% rise in the minimum wage. While that hardly seems exorbitant, it would be the largest increase in history.  Even with that raise, minimum wages in Japan would remain low by OECD standards, and barely half of New Zealand's.

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The Bank of Japan sees continued wage growth as a critical indicator that deflation has been tamed.  Assuming that is achieved, markets expect the Bank`s interest rate to turn positive some time in 2024.

 In this context Japan`s infamous demographic challenge may have some upside.

Japan has managed to avoid high unemployment throughout its three decades of slow growth.  But with a shrinking labour force and tight employment, the government is gingerly exploring increasing immigration.  Last week it loosened conditions on visas for foreign entertainers coming to Japan – such as musicians, singers and artists.  Expect more such low-profile adjustments to come.

 Alongside the return of mass tourism after COVID, the result is highly visible on the streets of Tokyo: lots of foreigners.

While the local-born population continues to fall, the foreign population rose 9.4% to 3 million in 2022.  In Tokyo the increase was 12% - including large numbers of students and technical trainees.

The trend looks likely to continue.

 The Japan International Cooperation Agency estimates the country needs to bring in a further 6.74 million foreign-born workers by 2040 to attain its economic growth targets, nearly quadruple the number in the country in 2020.

Japan`s dreadful record of empowering women also provides upside opportunity. 

Female participation in the labor force has improved considerably in the last 10 years and is now close to the highest among G7 countries, but women are still severely under-represented in management and in STEM (science, technology, engineering and maths) fields.  The IMF estimated in May that bridging the gender gap in these fields could alone boost Japan`s total factor productivity by 20 percent.

 More women working would also improve the quality of its governance. 

Corporate pressure, especially from US investors, is forcing companies to appoint more women to their boards.  At the top 1,800 companies on the Tokyo Stock Exchange women accounted for a paltry 11.4% of Board directors in 2022, against a G7 average of 38.8%.

As China becomes a higher risk environment for foreign business, Japan is looking like a highly attractive alternative, offering a sophisticated and stable business environment, affordable assets, highly competitive labour rates and improved corporate governance. 

 It`s not just foreigners driving the change.  Many of the key changes are coming from within Japan – more women in the workplace, an acceptance of the reality of inflation, the desirability of wage growth, and a push for higher returns on assets for the oceans of cash held by companies and individuals.

Waiting jobs at Dennys are available - at JPY1300 ($NZ11.80) per hour./ Image supplied 

Japan`s economy has flattered to deceive many times in the last thirty years.  Its fundamental challenges remain substantial – particularly the declining and ageing population and its massive burden of government debt.

The biggest challenge at this point may be its own government.

The IMF and OECD have recommended policy action in key policy areas such as balancing the government`s books, improving labour markets, and raising digital capability, but the response from the LDP-led government has so far been slow and stumbling.   

Prime Minister Kishida has promised to double Japan’s defence spending, and to massively increase spending on child care to improve the birthrate - but without indicating where the funds will come from. 

Japan was the only government to front at the recent G7 Gender Ministers` meeting represented by a man.

And Digital Transformation Minister Kono`s attempts to get rid of fax machines and the hankou stamp appear to be making heavy weather.

The economy seems be showing promising signs of radical change, but Japan's same old politics is standing in the way.

  The views expressed are those of the author

- Asia Media Centre