Optimistic about Japan’s economy? Think again

Koh Hyun-kohn
The author is the executive editor of the JoongAng Ilbo.

Japan has turned vibrant amid long-awaited positive signs for the economy, a rare scene over the last three decades since the bubble burst in 1991. Its GDP grew 0.7 percent on quarter — and nearly 2.7 percent on year — in the first three-month period. The hype is understandable as the economy had been moving at a snail’s pace.

Some say Abenomics — the ultra-loose and stimuli policy under Prime Minster Shinzo Abe — are finally bearing fruit. In the Japanese economy primarily driven by domestic demand, private consumption takes up 54 percent of the GDP. Stubbornly lethargic consumer spending edged up 0.5 percent in the first quarter along with a 1.4 percent increase in facility investment. The country is packed with tourists thanks to the weak yen and reopening after the Covid-19 pandemic. In March, 1.82 million foreign tourists visited the country, a whopping 100 times greater than a year ago.

The pickup in consumption has bolstered companies. According to the Nikkei, the combined net profit of listed companies is expected to grow more than 2 percent this year. Stagnant wages also moved up. This year’s wage increase is expected to be the highest since the 3.9-percent gain in 1993. The Nikkei Stock Average topped 33,000, a 33-year high.

Japan has emerged as an alternative to Taiwan for investment amid the conflict between the U.S. and China. Warren Buffett’s investment conglomerate Berkshire Hathaway shed its stock holdings in Taiwan Semiconductor Manufacturing Company (TSMC) and instead bought $6 billion worth of stocks of Japan’s five major trading companies, including Mitsubishi.

Everything seems to be going well for the economy. Can the country be finally stepping into the benign cycle where income growth spurs spending and pushes the economy out of the deflationary spell? Could the “Oracle of Omaha” be right about his bet this time too? It may be too early to open the champagne. Japan adhered to a zero-interest rate while the rest of the world have sharply raised interest rate to fight the worst inflation in decades. The revival of Japan’s economy owes much to lush liquidity, not to its strengthened fundamentals.

Consumer prices have been rising by 3 to 4 percent, giving the first taste of inflation to young Japanese as headline consumer prices have stayed around 1 percent since the 1990s. Deflation has long stifled Japan. But if prices rise sharply, inflation can be equally damaging by worsening living standards. The main opposition Constitutional Democratic Party has been demanding policymakers come up with measures to tackle high prices.

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Still, Japan cannot raise the base rate to tame inflation. Tokyo increased fiscal spending to stimulate the economy. Japan’s national debt to GDP ratio (256 percent) is the highest among advanced economies. As the government issued bonds to finance the stimuli programs, the Bank of Japan currently holds half of the outstanding government bonds worth 530 trillion yen ($3.7 trillion), five times greater than 10 years ago, when Abenomics kicked in. If the rate goes up, government bond prices will fall to cause massive unrealized losses. As the interest burden is heavy, the BOJ cannot raise the benchmark rate easily.

The yen’s weakening is another hot-button issue. Due to the widening gap between the U.S. and Japanese rates, the dollar has shot up to 140 yen. As currency value reflects economic fundamentals, the yen’s weakening can translate into that much loss of Japan’s national power. Even when corporations are rich, people can be poor. Japan has been outpaced by Taiwan in GDP. The average workers’ wage is the lowest among the Group of Seven economies. It surrendered the No. 2 economic rank to China in 2010, and its No. 3 position is being challenged by Germany. In 1988, Japanese names made up more than half of the world’s 100 largest market-cap companies. Last year, only Toyota was included in the list.

Export fell 4.2 percent in the first quarter despite the weak yen. The decrease in exports largely resulted from slowed global trade, but the sagging competitiveness of Japanese companies played a part. While external demand for Japan’s high-value products remains sluggish, Germany has kept up growth in exports mostly led by high-value-added industrial products. Toyota and other major companies also have been moving their manufacturing bases overseas. The offshore share of production shot up to 24 percent in 2020 from 10 percent in 1998. Since products are made and sold overseas, they cannot benefit from the weak yen.

The biggest downside is Japan’s slow digital transition. Fax and stamps are still common in offices. Government offices and banks store files in floppy discs. There are many outlets that do not accept credit cards. Tokyo has been promoting the use of My Number Card — an IC-chip embedded identification card to help citizens to obtain certificates and other official documents without going to the local ward office — but the campaign has been slow due to frequent flaws in the card. Japan ranked 62nd among 63 countries in digital technology in the IMD World Competitiveness Ranking. The country remains at the bottom in big data application and corporate agility. Despite the rapid changes in the world, companies hoard what they earn and keep to conservative management. Corporate ownership structure also poses as weakness. As the decision-making process is made by the board of directors instead of an owner, fast and aggressive investments are difficult.

Japan came in 13th in the Global Innovation Index 2022 measured by the United Nation’s World Intellectual Property Organization. Korea ranked 6th. Japan is used to complying with the familiar regime instead of attempting challenge and changes. The country has a feeling of supremacy and lacks a sense of crisis. Even if the government does wrong, the ruling power rarely loses power. Economic bureaucrats are still mighty. As Japan is the most aged country in the world with 29 percent of the population aged over 65 as of 2021, the prospect of boosted domestic demand is not bright. There are too many downsides to bet on its economic rebound. The International Monetary Fund forecasts Japan’s growth will slow to 1 percent next year. Unless innovative spirit seeps through the government, companies and the public, a real rebound may not be easy.