They got overtaken by Germany a country with 50% lower population and the gap is widening. Their gdp per capita is below some Eastern European countries and way below other developed countries that used to have similar gdp per capita. Yen’s devaluation is getting faster so in the future I don’t think Japan can even be called a first world country anymore. What exactly caused this? I know Japan has been in recession since the early 90s but this last few years seem to be extra harsh on Japan
In: Economics
A lot of the other comments deal with Japanese society, and all of those points are true: aging population, cultural rigidity, linguistic issues, and so on. However, none of those points answer the question you asked. So here’s the answer to the question asked.
The story starts in March-ish of 2020, and we remember a particular event that happened around that time. Covid strikes the world, and the world goes haywire. I don’t need to remind you, because you lived through it as did I. What tends not to be as known is what happened in Japan, because Japan is pretty much the only country in the world that didn’t have the same reaction as every other country.
In most countries, including the USA and my home of Canada, businesses were closed, people who worked in industries that couldn’t work from home were laid off en masse, and large numbers of people lost their sources of income. To avoid mass homelessness and poverty, the government (of pretty much every major economy) instituted economic stimulus. How it was instituted differs by country, but every country did it, and it was a historically huge government expenditure in every case, with that money going directly to individual consumers.
In Japan, this was not the case. Japan has a very ingrained work-at-office culture, such that even if you have a cold or flu, you put on a mask and go to work on a train where 6 millimeters of social distancing is a blessing, nevermind 6 feet. That’s just how it is. When covid hit, some businesses closed, and some people worked from home, but more or less business continued as normal. I believe, even in the worst of covid, the harshest government restrictions were that bars had to close at 8pm, that’s it. People were asked nicely to wear a mask, not mandated, and when the vaccine came out they were asked nicely to get the vaccine, and many did. The point being, all the restrictions and edicts we had in the West, were simply guidelines and requests in Japan, and aside from that things continued as normal. Because Japan didn’t close their entire economy, they didn’t have the levels of unemployment in the rest of the world, and so, while they did some stimulus, it was one of the lightest expenditures of any country (I think it was like $100 one-time payment or something equally meaningless).
What happens when a government injects way too much money into an economy is that prices go up. It’s supply and demand: people have more money, businesses want more money because they know they can get it. To an extent, yes, this is corporate greed, but if you think about supply chain dynamics it’s only minimal greed, as the greed of your supplier gets passed to your consumer, in aggregate. There are other issues at play and it’s not that simple, so I’m going to skip over those in the interest of simplicity, but the short answer is “yes, it’s partially greed but it’s more complicated than that so don’t go too deep down that rabbit hole”. When prices go up, this is called “inflation”. So, all this stimulus money, combined with other factors (border closures being one), caused massive inflation, estimated around 8-10% in the USA at the peak. Clearly, inflation is a bad thing for people (and, most importantly, voters), so the government worked to bring down inflation. The way they do that is by increasing interest rates to promote saving over spending, so businesses won’t be able to sell goods at inflated prices and have to lower their prices to sell goods (this is more complicated, but that’s the basic idea).
Japan, on the other hand, did not experience inflation, because they did not provide huge amounts of stimulus. Their prices remained mostly stable, and they did not have to increase interest rates as most of the rest of the world did.
One thing that happens when you increase interest rates is that you increase the return on investment (ROI) of government bonds. A government bond says that you can give money to the government, and they will pay you back some interest later. Since it’s the government, it’s the safest possible investment and is extremely popular amongst people with a low risk profile; it’s basically guaranteed money. Suddenly, worldwide government bond yields were hitting 5 or 6 or 7 percent, which is insane for an investment with zero downside. That is, for governments aside from Japan. And so, if you’re a hedge fund or mutual fund looking for a safe long-term investment and you want a government bond, you have a choice between investing in the US government at 6 or 7 percent, or in Japan at 1 or 2 percent. The choice is therefore obvious.
So, let’s say you want to buy a government bond. The government will only take a loan in its own currency, clearly. So if you’re a hedge fund looking to buy $10M of USD bonds, you have to acquire $10M of USD. Particularly, if you are NOT looking to acquire $10M of JPY, you do NOT need to acquire $10M of JPY on the foreign exchange market. Which caused a catastrophic decline in the value of JPY in forex markets. Since Japan does a lot of importing, being a small (in land mass) island nation, the cratering of their currency caused intra-national prices to increase, leading to an economic slowdown. Furthermore, since GDP is measured, for comparative purposes, in USD, the cratering of the value of the JPY caused Japan’s GDP, as measured in USD, to fall precipitously.
And that’s the answer to why their economy is in the shitter right now.
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