Japan’s population is declining, deflation has returned, and the nation’s economy is still stuck in cycle of weak, stop-start growth. And yet, there are a number of hidden and underutilized resources that Japan could tap to try to escape this economic malaise.
The Organization for Economic Co-operation and Development (OECD) notes that while demographics are against it, Japan still has a huge wealth of human capital, thanks to its highly trained and educated people. There’s also dormant capital and even unused inventions that could be put to work to increase growth.
Japan was the world-leader in numbers of patents issued in 2014, according to the World Intellectual Property Organization, with almost 300,000 patents. The U.S. was second with almost 260,000 and China was third.
However, for all that inventiveness, Japanese companies were much less aggressive with innovative new products and businesses.
“If you look at the patent data, there is lots of innovation in Japan,” said Yumiko Murakami, head of the OECD’s Tokyo office. However, there are risks in commercializing that, and Japanese culture doesn’t allow people to come back from mistakes, she said. “We need to create an environment where risk-taking is attractive.”
Meanwhile, Japan’s women are some of the most highly educated people in the world, and yet many leave the workforce to have children and then don’t return, or return to part-time, lower paying jobs.
Although there has been some improvement in this trend in recent years, there is still a big gap with men and with women in other developed nations. Their absence from the workforce during their 30s and 40s, which are the prime working years, hurts their chances of advancement, reduces life-time incomes, and wastes the time and money spent on their education.
It’s similar for older Japanese, whose labor force participation declines markedly once they hit 60 years old, which is the mandatory retirement age in many companies. Japanese are some of the longest-lived people in the world and they have higher literacy and numeracy skills than the average for developed nations. For them to leave the workforce early, or officially retire and then come back at lower pay, hurts their potential lifetime income and also overall growth.
“Japan has great people, assets and capital, in both quality and quantity. The issue is we don’t see that benefiting output,” said Murakami. “We have to reform the structure of the economy, and improve the system.”
Boosting the nation’s lagging productivity is another way the government and companies could generate more output despite the shrinking population. From 1970 through 2014, Japan had the lowest productivity-per-hour of any Group of Seven nation, according to a report from the Japan Productivity Center.
The amount of unused money socked away at Japanese companies and banks is not a new or hidden story, but it is a huge untapped resource for the nation.
Households held ¥920 trillion of their assets in cash or deposits at the end of June, the second-highest level on record, and corporate cash and deposits stood at ¥242 trillion, an all-time high.
In addition, there was ¥218.5 trillion more money deposited at the nation’s banks than was loaned out at the end of October, and with lending rates so low, this is a huge source of possible funding, if there were willing borrowers.
If Japan was to utilize these resources, it could “dramatically transform” the nation, the OECD’s Murakami says. The biggest problem facing the nation is how to reform the economy’s structure to use these hidden and ignored treasures. Those reforms will hurt, Murakami says, but if it that pain is postponed, then the nation will die.