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 $10M of JPY on the foreign exchange market. Which caused a catastrophic decline in the value of JPY in forex markets. Since Japan does a lot of importing, being a small (in land mass) island nation, the cratering of their currency caused intra-national prices to increase, leading to an economic slowdown. Furthermore, since GDP is measured, for comparative purposes, in USD, the cratering of the value of the JPY caused Japan’s GDP, as measured in USD, to fall precipitously.
And that’s the answer to why their economy is in the shitter right now.
> I don’t think Japan can even be called a first world country anymore
Thats one way of saying you’ve never been to Japan.
They are roughly the 30th highest GDP per capita in the world despite having a ton of “unproductive” retirees weighing them down. But they are 100% first world. I’d argue more so than GDP heavyweight America thanks to its robust mass transit systems and universal healthcare.
Comparing Germany to Japan is a bit unfair as Germany is one of the most productive countries in the world. They also benefit greatly from the European Union which grants them a huge “domestic” market and makes it easy for Germany to brain drain some of the best talent from other EU countries. Also, Germany only has 32% less population than Japan, not 50%.
I highly recommend you visit Japan. It is one of my favorite countries.
Japan has a lot of debt.
Japan can’t raise interest rates, because it means the government and businesses will need to pay more for debt.
This has led them to be unable to raise interest rates while many other countries did.
If you have 1$ and the U.S government is like “Hey if you give me $1 I’ll give you 1.05$ in a year”, and government of Japan is like “Hey if you give me $1 I’ll give you a $1 in a year”. Who is going to give their $1 to Japan?
This has made the Yen not a competitive currency on the global markets causing it to devalue.
In short.. Demographics. [https://www.populationpyramid.net/japan/2020/](https://www.populationpyramid.net/japan/2020/)
In the 1980s, people thought that Japanese economic might was going to take over, then they started hitting demographic friction. The growth stopped. Huge amounts of workers aged into retirement. They all need to paid pensions. They all need their healthcare.
The 1990s came around, and they faced an economic crises and resulted in a lost decade, which turned into a lost 20 years, which turned into a lost 30 years. They have been investing their production into other countries with better demographics (Thailand, Philippines, Vietnam, United States). They had to outsource because they did not have the local labor to sustain the industry. Its also why they have entered trade agreements with the US where they got a pretty shit deal, but it was still the best choice. Its also why they are buying their way into the US Military Alliance.
Japan is a sneak peak at what many other countries are going to be facing over the next 10-20 years, only Japan has been preparing for it for decades and demographic issues. China, South Korea, Germany, Russia, Italy, and a few other major global players are all going to be facing this fate soon.
Japan’s predicament is why many countries bailed out their financial institutions after 2008. Japans banking system crashed in 1990 and wasn’t bailed out. Their banks are still burdened with all the bad loans from the 80’s
[https://www.npr.org/2024/04/03/1197958583/japan-lost-decade](https://www.npr.org/2024/04/03/1197958583/japan-lost-decade)
Not to be harsh to you OP but your post is very naive. To say that Japan « may not be a first world country anymore » is laughable. Visit the country some day, it’ll change your mind.
I reject the premise of the question categorically. The Japanese miracle in the 20th century moved a country that was rubble at the end of WWII to the second strongest economy in the world in the span of less than 30 years. They fully achieved economic goals in multiple areas. They are number one in an array of categories in industry (automobiles, robotics, precision machinery, chemicals, pharmaceuticals) and science, especially applied science (materials science, semiconductors, astronomy, biotech, earthquake and disaster research). Not a “first world country”? Pfft.
There’s a lot of answers here that don’t, I think, get to the heart of the issue. Japan after WWII eventually landed on an economy that’s partially open markets, and partially centrally planned. History suggests that open markets will always win in the long term, either by beating competitors or taking over the systems in which they exist. In the case of Japan, open markets have failed to take over the system in which they exist, and as such are being beaten by other, open-market economies.
Japan started in 1950 without many factories and homes. They borrowed money and built these factories and homes and because they were really needed they were making lots of money. But by the 1980s they had enough of these, but they were in the habit of borrowing money to make factories and homes, so they kept doing this. By the end of the decade they had too many factories and homes and these new ones weren’t making any money, they were sitting empty, but people still had debts they borrowed to pay for these factories and homes that weren’t making any money. These were very large debts. So Japanese cut back their spending so they could pay back these loans. But because they all cut spending they were selling less to each other and making less money. So it took them a very long time to pay back their loans during which time there economy hasn’t grown much.
This is what called a investment lead growth model, turning into a balance sheet recession.
A first world country is not defined by numbers on paper. Despite all the sensationalist headlines the people of Japan enjoy a high standard of living, the country has great infrastructure, people don’t struggle to make ends meet with the money the average person is making and the country’s doing well. Growth has stagnated, which is not necessarily as bad in practice as it is on paper.
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