Not So Mighty Anymore

Japan’s economy has been in the doldrums since 1990 when its stock bubble burst. The first decade after the market collapse has been characterized by recession, deflation, near- zero interest rate and massive fiscal pump-priming. The second decade was more of the same thing. Only now is the US$ 4.5 trillion economy showing some life. The GDP grew at an annual rate of 2.7 % & 4.8 % for the last two quarters respectively.

A direct result of the fiscal stimulus is the accumulation of the biggest public debt of the development world which amounts to almost twice the size of its economy. To help boost the economy, the government has deliberately depressed the value of its currency. The hope was the undervalued currency, near-zero interest rates and fiscal stimulus would create a self-reinforcing growth dynamic that would raise consumption, GDP and wages.

But the growth could very well be ephemeral. If the extravagant spending on public works projects is taken away, the growth could just fizzle away. Also, the revaluation of the Yen this year has stymied exports and this has helped cause one third of Japan’s factories to sit idle.

Another problem Japan has to content with is its shrinking population. The nation of 126 million people is aging fast. Twenty three percent of its people are over the age of 65 while less than 13 % are younger than 15. Coupled with a policy of strict immigration control, it would be hard for the nation to increase its production. The nation also has to compete with fast emerging economies like South Korea, China and India.