Why Japan Is No Longer Among The Three Largest Economies in the World

Nobel prize winner Simon Kuznets once said, “There are four types of countries: developed, undeveloped, Japan, and Argentina.” though this may sound apocryphal, it does make sense when you look at the history and geography of Japan. Japan barely has natural resources that can make it stand out on the global scale, but with the post-WW2 industrialization efforts coupled with violent westernization, the island nation became a force to be reckoned with and was living in the future when all other nations were still picking themselves up. It was the second largest economy in the world two decades ago; then it was the third largest a few weeks ago, and today it is in fourth place. So, what went wrong that it lost its place on the podium? This is one of those situations that doesn't have a single solid reason but a number of reasons, which all grew in their own bubble before colliding with each other and bursting. There are a multitude of microeconomic and macroeconomic factors, which are listed below that can be attributed to its current predicament.

Aging Population

According to the WEF, 1/3rd of Japan’s population is over the age of 65; this has placed an unspoken pressure on the youth to provide for them; this also means that they have more people retiring while fewer people are joining the workforce. Other nations facing this problem rectified this issue by creating an environment where talented immigrants can fill up the gap. Another ideal solution is to tell their citizens to have more children, but for reasons that are mentioned later, Japan is failing at both of them.

This also leads to a drop in productivity and loss of consumer spending, which brings us to the next reason, the Conservative mindset.

Conservative Mindset

As mentioned above, a quarter of Japan’s population is over 65, which means a lot of people in top leadership roles are people who are elderly and have been working at the company for a long time that they might have been working at the company even before the youngest employee there was born. It is common to hear stories where the higher-ups are reluctant to adapt to new technologies or methodologies that are way better. Still, they can be seen going, “It has been like this for a long time. Why should we change it?” usually to counteract a decreasing incoming workforce; better technology has been proven to remedy that. The upper management is reluctant to accept changes. Ironically Japan was the most technologically advanced nation, they were dubbed by numerous economists as “living in the future”, but they never moved past that and are reluctant to accept new technologies.

Deflating Economy

What happens when people are old and conservative in their habits to an economy? They are going to consume less. This leads to a deflating economy. While the idea of lower costs on commodities might appeal to an average consumer, but from an economic point of view, it spells disaster. It means less money flows into the economy, and it increases the debt of the nation. And also means no wage hikes. This would make it a no-go zone for entrepreneurial ventures and, by extension, a red zone for investors.

For more than two decades, Japan's national debt has floated above 100% of its GDP. In fact, as of the second quarter of 2022, Japan's debt-to-GDP ratio was 226%. In other words, Japan has been able to maintain a very high level of debt for decades.

Work Culture

The Japanese language is barely spoken outside of Japan, and the whole prospect of learning a new language to get a job. At the same time, there are places with better opportunities with just the knowledge of the English language. This feature doesn’t give anyone a strong reason to seek a career in a deflating nation with the possibility of no salary increase. To add to the mix, Japan has one of the longest working hours and an overtime range of 90+ hours per month. The Japanese value long working hours as a dedication to their duty, and it is frowned upon if this quo is not maintained. This has led to a situation where people can’t have time for families, leading to one of the lowest birth rates in the world.

At one point in history, economists were estimating how long it would take for Japan to surpass the USA as the largest economy in the world, but this never came to fruition. Japan is attempting solutions like maintaining negative interest rates. They are showing results, but not the kind of results the policymakers are expecting.

But at the same time, what we now identify as problems were once born as solutions for the issues they faced back in the past. Another thought that we all can ponder here is, “Is it possible to have infinite growth in a world where everything is finite?” how much can a nation, or an organization for that matter, grow infinitely without hitting a plateau? How can infinite growth even be sustained? Unless changes happen at the grassroots level, where they need to change how they function as a society, policy changes may be of little help to their economy.