Between fiscal 1991 — when the economic bubble burst — and fiscal 2008, Japan’s gross domestic product all but stopped growing, rising a mere 1 percent per year on average. Negative growth was avoided simply because of deflation, as the nominal growth rate averaged only 0.4 percent.
By contrast, during the period of high economic growth from July 1958 to October 1973, the economy expanded at an annual real rate of 9.4 percent on average. Four major factors brought about this decade and a half of rapid growth:
• Manufacturers provided markets with an endless supply of new products that became popular.
• Until 1971 the value of the yen was kept low at ¥360 per dollar under the fixed exchange rate system.
• The dollar-denominated price of crude oil remained so low that Japan, which had virtually no oil reserves of its own, was able to import and consume oil like water.
• Huge public works projects were carried out constantly such as bullet train railways, expressways, bridges linking Honshu and Shikoku, and the Honshu-Hokkaido underwater tunnel.
These four factors have either disappeared or undergone drastic changes. Although new products attractive to many are still launched in the marketplace, most are digital in nature and don’t have much ripple effect for other industries. It has become increasingly difficult for the government to shore up personal consumption through fiscal and monetary policies.
The value of the yen, meanwhile, has gradually risen to ¥90 since exchange rates were floated in 1973. The inherent uncertainty of exchange-rate fluctuations has hurt the profits of manufacturing companies. South Korean and Chinese competitors have caught up with or overtaken Japanese firms in some manufacturing fields.
Although oil prices plummeted by 70 percent from their peak due to the global recession that started in the fall of 2008, they have now bounced back to between $75 and $80 a barrel. The high oil prices caused a sharp increase in Japan’s dollar-denominated import bill.
In fiscal 2008, Japan’s trade balance in goods and services was in the red for the first time since fiscal 1980, when the nation was hit hard by an oil crisis. China and India’s increasing demand for oil is likely to push oil prices up further. Food prices are likely to go up due to climate change.
All these factors will turn Japan’s net exports (exports minus imports) negative and further slow growth of the export-led economy. Indeed, the Japanese economy contracted by 4.2 percent in nominal terms in fiscal 2008. Nominal GDP in fiscal 2008 stood at ¥494 trillion, compared with the ¥498 trillion in fiscal 1995, meaning that the economy did not grow during those 13 years.
Japan is now blessed with more than enough roads, railways, bridges and other public facilities. Personal consumption has dwindled, as has the need for capital spending in the private sector. Corporate spending is likely to shrink further because of structural shifts from basic materials industries to processing and assembling, and from manufacturing to service industries.
Prime Minister Yukio Hatoyama’s slogan of shifting the emphasis “from building concrete structures to developing human resources” represents meaningful long-term policy change, but it is not likely to produce the immediate effect of buoying the economy.
It should be noted that Japan spends far less than any other industrialized nation on education, research and health care as a proportion of GDP. The multiplier effect from government programs to make elementary and secondary education free or to provide cash allowances to families with children will be small. Although government fiscal expenditures may increase families’ disposable income, the marginal propensity to consume — the proportion of additional disposable income that actually goes to consumption — is expected to remain low.
The Japanese economy is already reaching “maturity.” Consumers have become more conscious of prices and quality, and are less likely to buy top-brand goods and eat at plush restaurants. Younger generations are no longer as interested in going abroad or buying automobiles as they once were.
On the other hand, medical and health care expenditures are bound to rise as the population ages. Younger families are spending more money out of pocket to look after parents. The decreasing number of children and the rising number of elderly will undoubtedly reduce spending on goods and services, except in the medical and health care fields.
The population is already in decline and is predicted fall below 90 million by 2055. Those at least 65 years old are forecast to account for 40.5 percent of the population in that year. It is impossible to hope for economic growth in terms of gross domestic product.
There are only three ways in which the economy can grow: (1) Government encouragement to purchase eco-friendly products, including electric-motor vehicles, plug-in hybrid cars, LED lighting, stationary fuel cells and energy-conserving houses and buildings. Popularization of these products will mitigate the effects of climate change.
(2) Stepped-up investment in newly emerging and developing economies, which in turn will boost their demand for Japanese products. (3) Invitations to professionals from other countries to immigrate to Japan to make up for the population decline. Japan should be more positive about opening its door to scholars, researchers, medical doctors, nurses, lawyers and architects.
Would not opening the door to foreigners in all fields, as the sumo world has done, be the key to elevating the nation?
Takamitsu Sawa is a professor at Ritsumeikan University’s Graduate School of Policy Science and an appointed professor at Kyoto University’s Institute of Economic Research.