What’s Wrong With Japan’s Economy?

Japan has the world’s oldest population, as well as a low birth rate and little immigration, but its growth problems go far deeper. In the early 1990s, the country’s postwar growth boom collapsed—decades of deflation followed and Japan started to suffer a shortage of workers.

Investment still below pre-crisis level

Japan hasn’t fully overcome deflation

Annual core CPI

Real capital spending (trillion yen)

Inflation spike due to

sales tax increase, not

economic recovery

Q1 '07

77

Q1 '16

FY'98

72

-0.2%

FY'15

0%

Investment still below pre-crisis level

Real capital spending in GDP data (trillion yen)

Q1 '07

77

Q1 '16

72

Japan hasn’t fully overcome deflation

Annual core CPI

Inflation spike due to

sales tax increase, not

economic recovery

FY'98

-0.2%

FY'15

0%

Investment still below pre-crisis level

Real capital spending in GDP data (trillion yen)

Japan has not fully overcome deflation

Annual core CPI

Inflation spike due to

sales tax increase, not

economic recovery

Q1 '07

77

Q1 '16

FY'15

-0.2%

72

0%

With the Japanese people unwilling to spend, companies are increasingly investing overseas rather than at home. A lack of deregulation further fuels the trend. Wages are stagnant and growth has stayed low, with frequent recessions.

Japan’s debt burden far outstrips that of other countries, largely a result of the stimulus introduced to help fix the economy. Abenomics, Prime Minister Shinzo Abe’s rescue plan, has helped to weaken the yen and boost corporate profits but wages and domestic spending have remained fragile.

Higher debt led the government to consider a sales tax increase for revenue. But the last time it was imposed in 2014, consumer spending and gross domestic product fell, sending the economy into a recession.

Consumption dropped after sales tax hike

GDP also dropped

Real private consumption (trillion yen)

Annualized real GDP (trillion yen)

Sales tax hike

Q1 '14

Sales tax hike

322

Q1 '14

535

Q1 '16

Q1 '12

530

522

Q1 '12

Q1 '16

307

307

Consumption dropped after sales tax hike in 2014

Real private consumption (trillion yen)

Sales tax hike

Q1 '14

322

Q1 '12

Q1 '16

307

307

GDP also dropped

Annualized real GDP (trillion yen)

Sales tax hike

Q1 '14

535

Q1 '16

Q1 '12

530

522

Consumption dropped after sales tax hike in 2014

GDP also dropped

Annualized real GDP (trillion yen)

Real private consumption (trillion yen)

Sales tax hike

Sales tax hike

Q1 '14

Q1 '14

322

535

Q1 '16

Q1 '12

530

522

Q1 '12

Q1 '16

307

307

The government’s decision to postpone introducing an additional increase may have protected against a return to recession, yet it disappointed investors who wanted to see Japan tackle its debt.

The BOJ’s unprecedented asset-purchase program, which began in 2013, increased its balance sheet relative to GDP well beyond those of most other developed economies.

The monetary stimulus weakened the yen, and until earlier this year exporters felt the benefit: Corporate profits increased and stock prices rose. But consumer spending hasn’t followed and—with the central bank still far from its 2 percent target—neither has inflation. To make matters worse, the yen strengthened again in 2016 as it’s viewed as a haven in times of global uncertainty.

Yen’s fluctuation since 2012

Yen vs US dollar

80

1/1/2013

Yen strengthened in 2016

1 USD = 86.7 JPY

90

7/28/2016

1 USD = 105.27 JPY

100

110

120

130

Yen’s fluctuation since 2012

Yen vs US dollar

80

Yen strengthened in 2016

90

7/28/2016

100

1 USD = 105.27 JPY

110

1/1/2013

1 USD = 86.7 JPY

120

130

Yen’s fluctuation since 2012

Yen vs US dollar

80

1/1/2013

Yen strengthened in 2016

1 USD = 86.7 JPY

90

7/28/2016

1 USD = 105.27 JPY

100

110

120

130

The BOJ says it will keep taking whatever action is needed to meet its targets and Abe has pledged “bold” measures this fall. Yet with stimulus failing so far to spur growth, economists and policy makers say broader, more dramatic strategies are needed. Here are some suggestions—and why they would be tough to implement.