The Heisei Era was a turbulent period for Japan’s economy. It was marked by protracted stagnation and sluggish growth following the collapse of the bubble boom, which peaked just as the era began in 1989 with the enthronement of Emperor Akihito, who is abdicating at the end of the month. While the economy may be on a more positive note as Heisei ends, structural challenges confronting the economy must be addressed as the top policy priority of the Reiwa Era.
In 1989, Japan accounted for 15 percent of the world’s economy; now its share of the global GDP is down to around 6 percent. Japan’s per-capita GDP is now in 20th place among 36 OECD members. Its global competitiveness has sharply declined. Leading Japanese companies, which used to dominate global rankings in terms of aggregate value, are now nearly gone from the list.
The bubble boom from the late ’80s to the early ’90s saw the prices of land and other assets soar. The Nikkei average on the Tokyo Stock Exchange hit its peak in at the end of 1989 — a level that has since never been recovered. The subsequent collapse of the bubble plunged the economy into a long-term decline. The financial sector was saddled with massive amounts of nonperforming loans. The “convoy system” led by the Finance Ministry ensuring that big financial institutions would not fail broke down during the disposal of the bad loans, and the late 1990s witnessed the collapse of major firms like Yamaichi Securities and Hokkaido Takushoku Bank, while some banks like the Long-term Credit Bank of Japan and Nippon Credit Bank were placed under state control.
Many firms went on to slash their workforces and shut down plants and offices. The employment of regular full-time workers was curbed, and businesses turned to irregular employees such as part-timers and temporary workers — whose positions are expendable in troubled times. The tough employment prospects and the expanding ranks of workers with unstable and low-paying irregular jobs — who now account for about 40 percent of the nation’s labor force — spread poverty among the younger generations. The “lost decades” since the 1990s, accompanied by persistent deflation, were exacerbated by the global financial crisis and recession following the 2008 collapse of Lehman Brothers.
Since 2012, the administration of Prime Minister Shinzo Abe has mobilized fiscal and monetary policies, in particular the unprecedented program of monetary stimulus by the Bank of Japan, to revitalize the economy. The economy has since been on an extended boom cycle, which the government has tentatively said is now the longest in postwar history. However, the average annual growth of the economy over the period is a meager 1.2 percent — well below the economy’s performance during its past extended booms. Despite the robust increases in corporate earnings and a labor market that is now the tightest in decades, wage growth has been subdued, hampering a full-scale recovery in consumer spending.
In a Cabinet Office survey on people’s social consciousness, 26.5 percent of the respondents cited the economy as an area where Japan is headed in the bad direction, up 6 points from a year ago, whereas a mere 7.5 percent said the economy was turning for the better, down 5.3 points. Such figures point to a growing sense of insecurity over the economy. And the longest postwar boom may now be in doubt as the government has begun to downgrade its assessment of the economy as the slowdown in China, hurt by its bitter trade war with the United States, hits the exports of Japanese manufacturers.
Meanwhile, the government’s goal of rebuilding its fiscal health continues to be pushed back. Despite the recovery in tax revenue, the target of achieving a primary budget balance — in which the government can pay for its policy spending without incurring fresh debt — has been postponed from 2020 to 2025. Even the new target of achieving a primary balance surplus in 2025, based on a rosy scenario of higher economic growth that the nation has not witnessed in recent decades, is still deemed out of reach without more stringent efforts to cut expenses. An overhaul of the social security system, which is taking an increasingly heavy fiscal toll burden due to the rapidly aging and declining population, continues to be put on the back burner.
During the outgoing Heisei Era, the government’s economic policy focused on dealing with the post-bubble boom crisis and fiscal/monetary measures to cope with the turbulent times. However, structural reforms to address long-term challenges such as the falling and aging population and generate new avenues of growth remain lagging. The severe environment surrounding the economy will not change with the transition from Heisei to Reiwa. The coming change of era should prompt the nation to think again what needs to be done, including painful reforms, to overcome those challenges.