Japan not in great shape as it reels from economic challenges

Japan, the third-strongest global economic power for over a decade, has been surpassed by Germany. It grapples with inflation, sluggish consumerism and demographic decline.

AFP

This picture taken on April 15, 2019 shows a sumo wrestler taking part in a "honozumo," a ceremonial sumo exhibition, on the grounds of Yasukuni Shrine in Tokyo.

Japan not in great shape as it reels from economic challenges

Abdel-Rahman Ayas

last update on 07 Mar 2024

In 2023, Japan lost its status as the third-strongest global economic power to Germany. With a significant drop in the yen’s exchange rate this reveals more than just a simple change in rankings.

Japan's nominal GDP is $4.2tn, compared to Germany’s $4.5tn. Despite a positive real growth of 1.9% in 2023, compared to 1% in 2022, the archipelago can’t ignore the impact of its weakened currency and internal structural challenges.

The Japanese economy suffers from fundamental problems. Accelerated demographic decline and low productivity are major obstacles. In 2023, Japan generated a GDP of ¥591tn ($3.94tn), barely surpassing its pre-Covid crisis level.

The continuous devaluation of the yen (-7% against the dollar in 2023) results from an ultra-loose monetary policy compared to monetary tightening elsewhere.

Japan’s economy experienced a new decline in the last quarter, marking a technical recession. Contrary to expectations, the GDP decreased by 0.1%, after a more significant decline of 0.8% in the previous quarter.

This situation surprised experts who anticipated a slight recovery. Household consumption and business investments also declined. Only exports provided a positive note, contributing slightly to the economy.

Reuters — Children and their teachers walk past an electronic screen displaying Japan's Nikkei share average outside a brokerage in Tokyo, Japan, March 4, 2024

Germany's ascent to the third global rank—despite its economy contracting by 0.3%—highlights the importance of inflation in calculating nominal GDP.

However, with India quickly closing in, this position could be temporary, ready to surpass both nations by 2025. The GDP per capita clearly remains a key indicator.

The difficult economic situation in Germany makes its title of the third-strongest global power less impressive than it seems. IMF forecasts have announced this title since October 2023, but, in Germany, many see it as an illusion.

Technical recession

Japan now ranks behind the United States, China, and Germany but is still ahead of India, the United Kingdom, France, Italy, Brazil, and Canada.

Japan is facing difficulties due to a technical recession and sluggish domestic consumption. Calls for economic reforms are growing stronger, especially to revitalise the export industry and stimulate domestic demand.

Japan is facing difficulties due to a technical recession and sluggish domestic consumption.

The cautious Bank of Japan may reconsider its plans for monetary tightening, formerly expected to be rolled out as of April, emphasising the uncertainty looming over the economic recovery.

Japan, which already yielded its second place to China in 2010, has sustained negative interest rates over an eight-year period. The Japanese economy is said to have unexpectedly contracted due to weak domestic consumption, pushing the country into recession.

Higher cost of living

As Japanese consumers face inflation, including rising prices for food, fuel, and other goods, private consumption decreased by 0.9% in the fourth quarter. According to Neil Newman, a strategist based in Tokyo, speaking to CNN, Japan imports 94% of its basic energy needs and 63% of its food.

Therefore, the yen's weakness significantly contributes to a higher cost of living. "Private consumption was particularly weak, (and) market expectations were that it would be stable," Newman said. He added that the Japanese currency has notably fallen by 6.6% against the US dollar since the beginning of this year.

It's important to note that the financial crisis may worsen for the Japanese following the earthquake that shook the Noto Peninsula in the central Ishikawa prefecture on 1 January, causing the death of more than 200 people and over 1,000 injuries.

In pictures: 7.5 magnitude earthquake kills dozens in Japan

According to Newman, citizens tend to stop spending during natural disasters, which is unlikely to improve the situation.

Demographic decline

Demographic decline continues relentlessly in Japan, and it's even accelerating. This is the conclusion drawn from the statistics of the country's Ministry of Health, published on 27 February.

According to these figures, as reported by the economic daily Nihon Keizai Shimbun, the number of newborns decreased by 5% in 2023 compared to 2022, reaching 758,631.

With deaths reaching 1.59 million, the natural balance, i.e., the difference between the two, exceeded the threshold of -800,000 for the first time. "The decline of national power is far from being halted," commented the newspaper.

This demographic decline is accompanied, unsurprisingly, by a shortage of workforce in certain sectors, as well as a significant challenge for institutions to provide assistance to the elderly, whose numbers are constantly growing.

The country's prime minister, Fumio Kishida, pointed this out last year by declaring that the country "is on the verge of being unable to maintain its social functions" and that it "simply can't wait any longer to resolve the issue of its low birth rate."

As Japanese consumers face inflation, including rising prices for food, fuel, and other goods, consumption decreased by 0.9% in the fourth quarter of 2023.

Forecasts and remedies

Despite this dark period, some economists remain optimistic and believe that the recession should ease in the coming months, given the stabilisation of inflation and the expected wage growth.

The new set of economic measures announced in November includes provisions aimed at mitigating the impact of high prices and supporting medium-term investment in various areas, such as economic security, ecological and digital transformations, and education.

It involves cash handouts for low-income households and temporary reductions in income tax and residence tax, costing approximately ¥1.1tn (0.2% of GDP) and around ¥4tn, respectively, or $7.33bn and $26.67bn, respectively, according to OECD estimates.

Current subsidies to offset the impact of rising fuel, electricity, and gas prices are also extended until April 2024, with those related to electricity and gas continuing to apply at reduced rates from May 2024 onwards.

These projections assume that subsidies will remain in place until the end of 2024 but will gradually decrease over time, alongside an annual increase in defence spending of around ¥1tn ($6.67bn) in 2024-2025.

Budgetary support is expected to decrease due to the expiration of pandemic-related measures and the gradual reduction of price subsidies in 2024, as well as the phased elimination of subsidies in 2025. The gross public debt-to-GDP ratio is projected to remain high, reaching 243.8% in 2025.

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