Japan has long been viewed as the epitome of stagnation in the economy, particularly during the 1990s when the economy was affected by the bursting of the asset bubble. Economists have referred to this period as the “lost decades”, which were characterized by very little growth, declining prices and declining global influence. Today, however, there is evidence that Japan is finally starting to turn the corner after long being viewed as stagnant.
During the 1980s, Japan was an economic powerhouse with booming industries in automotive manufacturing, electronics, and steel, as well as skyrocketing real estate prices and at times annual economic growth of 6.7% or higher.
However, the economic boom ended in early 1990s when the property bubble burst and property values plummeted, banks went bankrupt and government did not respond with the level of aggression needed to help stimulate the economy, resulting in decades of deflation or the continual decline of prices, which discouraged individuals from spending and or investing.
For over 30 years, both growth and job creation within the Japanese economy slowed significantly, with many periods of economic growth occurring between 0-2%. The Japanese stock market, the Nikkei, took 34 years to return to its previous peak and during that time, Germany actually surpassed Japan as the 3rd largest economy in the world.
Why inflation is changing everything
With inflation around 3% for the first time in over 20 years after falling or stagnant prices, people will be changing their behavior.
Investors have kept cash on hand over the years due to its stability and/or appreciation. However, with more inflation occurring recently, money has started to move back towards equities, businesses, and other productive assets.
This transition presents a tremendous opportunity for trillions of dollars in hidden savings to flow into productive activities in Japan. It also raises the level of economic activity throughout the country.
On top of that, Japanese companies are beginning to invest more in their infrastructure. Through a number of government-led corporate reforms, companies have been making major changes to governance and improving transparency, profit margins, and accountability. As a result, the Tokyo Stock Exchange has put pressure on listed companies to improve capital efficiency and increase shareholder value.
The impact of these changes is evident as Japanese stock markets recently reached all-time highs, and both domestic and foreign investors are becoming increasingly interested in Japan.
In addition, companies have made significant investments in automation, artificial intelligence, and major infrastructure projects over the past several years.
Aging population remains Japan’s biggest challenge
Japan’s demographic crisis, driven by its aging population, remains the country’s most significant structural challenge.
The population of working-age individuals peaked in 1990 and has been steadily declining since. The result of an aging population means fewer individuals in the workforce, reducing consumption levels, and ultimately reducing Japan’s growth potential.
Japan has expanded its female workforce participation, urged older employees to remain longer in the workforce and have made significant investments in automation to help offset these losses.
But there are limits to these solutions. Long term growth will be substantially reliant upon productivity and good innovative advancements.
ALSO READ: Why fears of a US-Iran war are rising again despite ongoing nuclear talks
Why global investors are watching Japan again
The COVID-19 pandemic and disruptions of the global supply chain due to economic shocks, has unexpectedly helped spark inflation and forward momentum within the economy.
Coupled with structural reform initiatives, domestic and foreign analysts are beginning to expect upward economic changes and expect Japan to finally emerge from its decades of stagnation.
Investors are seeing opportunities in sectors such as manufacturing, AI, energy, and infrastructure; industries expected to produce future economic growth.
So, what is the bigger picture?
Japan is not transforming overnight. Rising inflation, corporate bottoms line improvements and many billions of dollars in investments are collectively transforming the country’s economy.
The once cautious and flat-lined economy highlighted by decades of no growth, are signaling a case of confidence through growth in Japan.
For the first time in thirty years, the former global economic powerhouse may be regaining momentum and preparing to reclaim its position of prominence.
FOR MORE: https://civiclens.in/category/international-news/
About the Author
