Why Japan is struggling to recover its economic mojo

Japan, with a landmass just 11 per cent the size of India’s, has historically wielded an outsized influence in shaping the destiny of Asia and the wider world. This island nation has alternated between being a benign economic powerhouse and a belligerent military force. It has demonstrated remarkable resilience in both prosperity and adversity. Japan’s history is marked by dramatic cycles of rise, fall, and resurgence.

Japan launched two invasions of Korea in 1592 and 1597. Despite initial successes, Japanese forces were ultimately repelled. Japan then entered a long period of isolation known as Sakoku. It ended with the arrival of Commodore Matthew Perry’s “Black Ships” in 1853, which forced Japan to open its borders. This event led to the Meiji Restoration in 1868, marking Japan’s rapid modernisation and re-engagement with the world.

In the 20th century, Japan emerged as a significant and often harsh colonial power, expanding its empire to include Korea, Taiwan, Manchuria, and parts of East Asia. It went on to attack Pearl Harbor in 1941, drawing the United States into the conflict.

More from Opinion

Sergio Gor’s senate hearing signals the future of Indo-American ties How Trump’s ‘War on Drugs’ buildup against Venezuela has a hidden agenda

Geographical distance and historical circumstances insulated India from the impact of Imperial Japan’s excesses. It allowed India to maintain a cordial relationship with Japan, unlike many countries in East and Southeast Asia, which continue to be burdened by traumatic memories of Japanese occupation.

Humbled in World War II and devastated by the atomic bombings of Hiroshima and Nagasaki in 1945, Japan adopted a pacifist constitution in 1947. It renounced war and prioritised economic development over military expansion. Rising literally from the ashes, Japan achieved the “Japanese Economic Miracle”, transforming itself into the world’s second-largest economy by 1968.

The nation’s GDP registered a stunning surge from $47 billion in 1960 to $3.1 trillion in 1990 and an all-time high of $5,545.6 trillion in 1995. Seemingly unstoppable it was well on the road to become a superpower and even overtake the US economy by the turn of century. It actually surpassed America’s GDP in terms of per-capita in 1987.

By the 1980s, Japan’s manufacturing and financial prowess was at a zenith. In 1989, it accounted for an impressive 42 per cent of the global equity market share and approximately 18 per cent of the global economy. The country was home to the world’s top ten banks and emerged as the largest lender to the United States. Remarkably, Japan’s land value was estimated to be four times that of the US, despite it being nearly 25 times smaller in size.

Japanese brands like Toyota, Honda, Sony and Panasonic became global icons. Japan ran up huge trade surpluses exporting automobiles, consumer electronics and machinery across continents.

Flush with cash from its economic boom, Japan embarked on a global acquisition spree, targeting prestigious real estate and industrial assets. Notable acquisitions included Columbia Pictures and New York’s Rockefeller Center. Japan’s remarkable economic success and innovative business practices during this period became essential case studies for institutions worldwide.

The rapid rise of Japan’s economic power led to growing concerns in the United States and other Western nations. In response, the US spearheaded efforts to curb Japan’s economic dominance through various measures, including imposition of countervailing tariffs and imposing the Plaza Accord in 1985 which effectively doubled Yen’s value from 240 to a US dollar to 120 by 1988.

In the 1980s, Japan experienced a dramatic surge in real estate and stock prices, which caused a significant asset bubble. This bubble began to deflate in early 1992. The Nikkei 225 stock market index, which had reached an all-time high of nearly 39,000 at the end of 1989, suffered a steep decline, losing about 60 per cent of its value by August 1992. Over the following decade, land prices fell by approximately 70 per cent.

The Japanese miracle began to fade with the bursting of the asset bubble. What followed was a prolonged period of stagnation and deflation that has already lasted some 30 years and dubbed as ‘lost decades’.

Japan’s GDP, which accounted for over 70 per cent of the US GDP in 1995, declined to just 15 per cent by 2023. In nominal terms, Japan’s GDP contracted from $5.55 trillion to $4.21 trillion during this period, while that of US surged from $7.64 trillion to an impressive $27.36 trillion.

China overtook Japan as the world’s second-largest economy in 2010, and in 2023, Germany surpassed Japan, relegating it to the position of the fourth-largest economy in nominal terms. This shift was partly driven by the steep depreciation of the Japanese yen, which fell from 95 to the dollar in 2010 to 140 by 2023.

The jury is still out on whether Japan is truly on the path to economic recovery. However, former Prime Minister Shinzo Abe’s widely publicised “three arrows” strategy—focused on fiscal stimulus, monetary easing, and structural reforms—along with Prime Minister Fumio Kishida’s “New Capitalism” agenda, emphasising heavy deficit spending and economic revitalisation, appear to be yielding some positive results.

The Nikkei 225 stock index finally regained the 39000 benchmark 35 years later in February 2024. Inflation is hovering around the target of 2 per cent. Interest rates which were near zero have started to creep up. Real wages have started to rise. Japan’s economy expanded 1.9 per cent in 2023 and is projected to expand further by about 1 per cent this year. On the flip side Japanese sovereign debt, though mostly domestic has ballooned to over 260 per cent of its GDP.

To sustain the growth momentum, Japan needs to find a new sweet spot which poses a significant challenge. Currently, no Japanese brand or business house ranks among the global top 10, with American tech giants and a company from Taiwan now occupying these positions.

(Part 1 of the two-part series.)

The author is a foreign affairs specialist and an ex-envoy to Canada and South Korea. Views expressed in the above piece are personal and solely those of the author. They do not necessarily reflect Firstpost’s views.