Japan Rising: Is the Land of the Rising Sun finally on the rise?

Writing in the Financial Times, noted investor and bestselling author Ruchir Sharma is highly bullish on the Japanese economy:

In periods of gloom like this one, when commentators see nothing but faults in most countries, it is worth highlighting the few that defy the prevailing pessimism.... The most surprising country on my list is Japan, where growth is actually picking up. After being dogged by deflation for years, Japan is also the rare country that gains from a return of inflation--now running just over 2 percent. Its supposedly weak corporate culture has been raising profit margins. Labour costs are now lower in Japan than in China. The cheap yen is boosting exports and could revive animal spirits in the market as a late reopening from Covid restrictions draws back visitors.

Other commentators (but not all) are equally optimistic. Could Japan economically could be in the midst of a positive "perfect storm"? Or was it a slow news day and the positive performance of the Japanese economy is being exaggerated?

DANIEL SNEIDER

Lecturer in East Asian Studies and International Policy, Stanford University

Japan has been struggling since the collapse of the bubble economy in the early 1990s to counter the perception that it has a hopelessly stagnant economy, burdened by public debt, living off the fruits of past innovation and technological leadership, its efforts at reform stymied by a sclerotic political system, with a society heading over a demographic cliff, and, not least, replaced by a relentless and growing China.

Some of those perceptions have shifted in the last decade. Japan has not only managed its debt well, but its central bank pioneered the use of monetary easing, now a global standard. Economic growth is not spectacular but per capita growth is at par with others. Unemployment was minimal, even during the worst of the pandemic, and income inequality in Japan is among the least in the advanced world.

But beyond these measures, Japan has become, again, a global leader. And it has done so by turning three things that appeared to be sour lemons into a sweet lemonade-an aging society, political stagnation, and a rising China.

Demographics is turning into a source of strength for Japan. It has been in the front lines of coping with an aging society--it leads the world with more than 28 percent of its population over the age of sixty-five, compounded by a shrinking population due to falling birth rates. But as a result, Japanese policymakers, at a local and national level, are coming up with new approaches to keep older Japanese engaged in the work force and innovative preventative care that keeps them healthy, both physically and mentally. Japanese specialists talk of creating "workplaces for a second life."

Japan has also become the world's leading power in robotics, supplying almost half the world's industrial robots. The need to replace labor with technology, including growing use of artificial intelligence in areas such as health care, is driving Japanese growth in many arenas.

As for politics, the almost uninterrupted monopoly on power of the conservative Liberal Democratic Party used to be seen as a negative, blocking crucial reforms like labor flexibility and protecting entrenched special interests such as agriculture. Now, looking out at a world struggling to contain extremist movements, fueled by nationalism and racialism, Japan's megastable system, one where the ruling party effectively blocks the emergence of such extremist threats, is a clear plus.

Last but not least, there is China, once seen as having left Japan in the dust. But China is struggling with the pandemic, retreating to a state-run economy as it suppresses the most dynamic elements of its market economy, and locked into an alliance with a Russia embarked on a dangerous war. Japan, in marked contrast, has re-emerged as a leader in Asia, an attractive partner in the region and globally, a source of investment, technology, leadership on trade policy, and even security. A renewed, global Japan offers a safe shelter from China's growing turbulence.

JOSEPH E. GAGNON

Senior Fellow, Peterson Institute for International Economics

Japan may well be the only G7 economy to avoid recession in 2023 and there is a good chance it will continue to grow at or above trend even as the rest of the world slows down.

The seeds of this good performance were sown in 2016 when the Bank of Japan adopted yield curve control targeting a ten-year bond yield of zero. This was always a second-best strategy in that it did little to speed the pace of achieving the Bank of Japan's inflation target of 2 percent. (The best strategy would have required monetary-fiscal coordination and jawboning to raise both public and private salaries and wages, as advocated by my colleagues Olivier Blanchard and Adam Posen in the Financial Times, December 2, 2015.)

Yield curve control was designed to leverage any future positive shock to demand or inflation into a sustained rise in growth and inflation through an automatic decline in the long-term real rate of interest. The post-Covid global inflation shock may be providing the necessary kick-start.

The massive widening of long-term yield spreads between Japan and other economies has pushed the yen to its lowest level in decades. That supports inflation both directly through higher import prices and indirectly through greater demand for Japanese exports, including tourism into Japan now that Covid restrictions are eased. It should help to insulate Japan from any harmful effects of the looming recession in other countries.

To preempt any slowdown, the government is adopting yet another massive fiscal package. It is also critical that Prime Minister Fumio Kishida appoint a new Bank of Japan governor in April who will stick to current governor Haruhiko Kuroda's resolute stance of maintaining yield curve control until inflation reaches the 2 percent target on a clearly sustainable basis.

Markets don't yet believe that Japan will achieve 2 percent inflation beyond the next year or two. But markets are notoriously bad at predicting changes in economic trends--they failed utterly to predict Japan's long decline into deflation. With both monetary and fiscal policies in strong support of growth and reflation, Japan is poised to outperform its peers in 2023 and beyond.

The only fly in the ointment is that the government of Japan has muted the price effects of the global energy crisis on Japanese consumers, which discourages energy conservation and thus forces more of the needed adjustment onto the rest of the world. The government should allow domestic energy prices to rise to world levels over the next year or two, both to reinforce inflation expectations and help reduce the burden of adjustment in poorer countries.

ANNE 0. KRUEGER

Senior Research Professor of International Economics, Johns Hopkins School of Advanced International Studies, and former First Deputy Managing Director, International Monetary Fund

A quarter-century after the end of the Second World War, analysts began recognizing that the Japanese were sustaining a high and even accelerating rate of economic growth even after the post-war reconstruction phase had ended. As Japan succeeded in sustaining a rapid pace over the next decade, American businesses and lobbyists became almost hysterical in their concerns about "unfair" Japanese competition. Protectionist pressures mounted, and the Japanese were, among other things, even persuaded to place "voluntary restraints" on auto exports. Those restraints enabled Japanese producers to raise prices in the American market and did little to help the U.S. auto industry.

The U.S. auto industry eventually learned to improve quality and compete, and restraints were removed.

As the near-hysteria about Japanese competitive and innovative abilities was peaking, the Japanese economy began running into major difficulties, and years of stagnation followed. Asset prices had risen sharply during the upswing and had to depreciate. That in itself put deflationary pressure on the economy. In addition, the rate of population growth was falling, and the population is now declining. The percentage over age sixty-five in the population has risen and will continue to rise. The deflation, which accompanied the asset price decline, itself contributed to perpetuating the stagnation.

The downward pressure on demand and the economy from the asset price bubble appears to have been spent, and prices have risen to the target rate of 2 percent. Japanese economic growth has picked up somewhat. But there are other headwinds. The slowdown in the Chinese economy and rising fuel prices are both negatives. Uncertainty about the entire geopolitical situation surely contributes further.

Absent significant improvement in the geopolitical situation and a reduction in uncertainty and pessimism about the global economy, it is difficult to foresee a remarkable economic future for Japan with economic performance much better than that of other oil-dependent economies. More likely, real per capita GDP will increase slowly but perhaps enough so that real GDP per capita rises. But the weight of population and labor force decline, the energy outlook, and the global economic/geopolitical situation weigh heavily.

Japanese economic growth has depended heavily on export performance. There is scope for significant improvements in productivity in nontraded goods including services, wholesale and retail trade, and construction. Were significant reforms undertaken, the outlook might improve markedly, but there is little sign that these measures are being seriously contemplated.

In the period before 1990, there was overoptimism about Japanese economic performance. Then there were two decades where pessimism has prevailed. The current spurt is unlikely to presage a shift back to the glory days. But the period of stagnation and declining real GDP may be over.

MARINA V. N...