Nearly three decades after its own asset bubble burst in 1991, Japan is still characterized as economically stagnant, weighed down by mounting debts and increasingly long-lived retirees. The latest data have deepened the gloom, with the IMF estimating that Japan’s GDP growth slowed to 0.9% last year from 1.9% in 2017. The benchmark Topix stock index slid almost 8% last year. It is easy—natural in fact—to be pessimistic about Japan.
The reality is more nuanced. The Japanese economy today is arguably healthier than it has been in over a decade, with annual GDP growth averaging 1.3% since 2012, again according to the IMF, double the 0.63% average in the previous decade. Prime Minister Shinzo Abe’s efforts to rejuvenate the Japanese economy, dubbed Abenomics, are beginning to bear fruit even if progress has been hesitant and uneven.
The structural reforms targeted in this third arrow are a vital ingredient for success. Stronger private domestic consumption is needed to tilt Japan away from its dependency on external demand. In the decade since the global financial crisis, Japan’s gross national product (which includes Japanese output from both inside and outside the country) is about 3% bigger than its GDP (which counts only output produced domestically) year after year, according to the Federal Reserve Bank of St. Louis. This trend is because Japanese businesses have been expanding production overseas to take advantage of cheaper labor and to get closer to their foreign customers, especially those in China and Southeast Asia. Simply put, Japanese businesses are investing where the opportunities are—and those opportunities are outside Japan.
Japan’s population is both aging and shrinking, which means the domestic consumer market will become even smaller. Compounding the situation is that wages have not been growing in recent years despite record-low unemployment. Abe has pushed hard to get Japanese companies to raise wages, with some success. Yet the real problem lies in the growing trend of companies hiring more contract workers and paying them almost less than half what they pay full-time workers. According to government data, the number of contract workers nearly doubled to 20 million in 2017 from 11 million in 1999.
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