What’s Wrong with Japan’s Economy?

What’s Wrong with Japan’s Economy?

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    What's wrong with Japan - Alvexo

    A number of flailing economies around the world are often discussed by journalists, policy makers, and economists, but one struggling economy that seems to be flying under the radar and not getting much media attention could have lasting effects on the rest of the world. Japan, the world’s third-largest economy, has been slowly deteriorating over the last few decades, and multiple attempts to revive the economy have proven futile.

    So what’s wrong with Japan? Japan’s economic woes aren’t due to any one event or circumstance, but rather are a perfect storm of inopportune situations that result in an economy on the brink.

    Social factors

    Since the 1990s, Japan has been faced with a huge shortage of workers, which has increased deflation and hurt the country. This is due in part to the fact that Japan has the oldest population in the world, with more than 26% of the population age 65 or older, compared to the global median of just under 18%. Older citizens don’t contribute to the workforce, but they require a costly payment from the government for their healthcare benefits. It’s citizens are dying off, but the country isn’t getting much new life—its fertility rate of 1.4% is lower than the global median, and international immigrants only make up 1.6% of the country’s population—a staggeringly low number when you consider the worldwide median is 12.2%.

    Debt and deflation

    Japan’s economy has been deflating for decades, partly because Japan customers don’t want to spend money because they are insecure about the financial future. This means that local companies are taking their business to other countries with a more supportive customer base, leading to stoic wages and job growth within Japan.

    The government has stepped in multiple times to try to jump-start the economy, which has increased Japan’s debt to near astronomical levels. Prime Minister Shinzo Abe’s current plan, known as Abenomics, has resulted in a weakened yen and increased corporate profits, but also unsteady domestic spending and wages. When the global median of government debt as a percentage of GDP is around 80%, Japan goes off the charts with more than 245%.

    Policy decisions

    Faced with a stagnant economy and no end in sight, the Bank of Japan will soon meet to discuss taking more drastic action to stimulate the economy. The staggering debt numbers have brought up discussion of increasing sales tax for revenue. This was done once before in 2014, which caused GDP and consumer spending plummeted and sent Japan into yet another recession. According to at least one economist, it will take a sales tax jump to at least 15% from the current rate of 8% for Japan to avoid a major financial meltdown within the next five to eight years. However, the prime minster pushed backed a sales tax increase to 10% until at least 2017, which shows that the government is hesitant to put the brunt of the solution on the public.

    Potential solutions

    The Prime Minister has promised to enact “bold” regulations to help the economy in the near term. After multiple stimuli have failed to produce their desired results, most experts agree that something more drastic needs to be done. There is no perfect solution, and many of the proposals could cause a major social or traditional upheaval for Japan. Possible ideas include expanding the workforce by promoting more women and allowing older workers to stay in their jobs for longer before retirement, promoting immigration to offset a decreasing and aging population, lowering debt by generating more revenue, or instituting changes to the industrial and labor markets to increase wages and create a more desirable flexible work environment.

    Many experts and locals question whether a government-led stimulus would even have any effect on the economy because essentially nothing else has worked up to this point. Japan as a country seems to be stuck in its traditional ways, but those current ways of thinking have gotten the country into a terrible mess. It may take a large mix up and changing of social norms to give the economy a much-needed jolt.

    Japan’s reaction to its economic problems could be a case study for other large countries with aging economies, including the United States. If Japan, once considered one of the brightest rising stars in the global economy, can face such serious issues, there’s no telling what country could be next. Japan’s response could set the stage for not only its own country, but for the rest of the world as well.

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