Kazutaka Mayuzumi Security, Trade and the Economy

Japan’s Economy is in Trouble

Over the past 50 years, Japan has become a global powerhouse and is currently the third largest economy in the world. The majority of Japan’s economic growth occurred following the end of World War II until the 1970s, with the highest GDP growth rates reaching up to 10% per year occurring in the 1960s. Much of the enormous growth that the country experienced has been credited to policies that facilitated high levels of interaction between the government and businesses that helped the businesses experience productive growth.

However, the Japanese economy has failed to achieve significant economic growth within the past few years. One of the main reasons for this lack of growth has been the fact that the Japanese corporate sector has been a net saver. This means that Japanese companies have been reluctant to take out any significant loans for investments, which are crucial for growing the companies and the economy as a whole. The Bank of Japan (BOJ) has been practising quantitative easing in an attempt to combat the weak growth and deflation in the economy. This has contributed to an already lavish spending habit that has put the government in more and more debt each year.

So how high is Japanese government public debt now? The answer is 240% of the country’s GDP. For comparison, the US’ public debt is currently at 100% of GDP, and Greece (which recently was on the brink of bankruptcy) has a debt level that is 180% of GDP. This begs the question of whether or not Japan will ever repay its debt. It means the Japanese government must find a way to increase its GDP growth rate, which is already low due to quantitative easing, to at least the level of interest rates, which are already low due to quantitative easing, in order to avoid a complete collapse of the economy.

Another serious problem that Japan is facing is its much-discussed population crisis. With one of the world’s lowest birth rates and highest longevity rates, Japan’s population pyramid has become inverted. As a result, an increasingly smaller labour force must support an increasingly larger group or retired citizens. The government estimates that the Japanese population may fall from 128 million (the peak population in 2007), to only 87 million in 2060.

Much of the blame for the record-low birth rates has been put on the unwillingness of Japanese couples to get married and start a family. This could be due to the weak outlook that the Japanese citizens have on the economy. With a lack of growth for the past few decades, Japanese couples may find that starting raising a family under the current economic condition in Japan would be difficult. Therefore, the Japanese government is under even more pressure to increase its growth rate if it wants to prevent its population from shrinking dramatically in the next few decades.

How the government will be able to achieve higher economic growth remains to be seen, but a solution must be found fast. Although the government has already attempted to decrease its debt by increasing consumption tax, a more impactful solution must be determined in order to lower a debt level that is over 1 quadrillion yen (USD 10.5 trillion).

Author

  • Kazutaka Miyuzumi

    Kazutaka Mayuzumi is currently a 4th year undergraduate student pursuing a double major in Economics and Human Resources/Industrial Relations at the University of Toronto. His main research interests include: economic policy and macroeconomics, financial economics, and financial market structure. His other interests include the causes, impacts and results of financial crises, in particular the 2008 Financial Crisis. After completing his undergraduate degree, he hopes to pursue his Masters degree in Economics and to work at a central bank or other type of financial institution. During his leisure time, he enjoys browsing the web and catching up on events occurring around the world.

    View all posts
Kazutaka Miyuzumi
Kazutaka Mayuzumi is currently a 4th year undergraduate student pursuing a double major in Economics and Human Resources/Industrial Relations at the University of Toronto. His main research interests include: economic policy and macroeconomics, financial economics, and financial market structure. His other interests include the causes, impacts and results of financial crises, in particular the 2008 Financial Crisis. After completing his undergraduate degree, he hopes to pursue his Masters degree in Economics and to work at a central bank or other type of financial institution. During his leisure time, he enjoys browsing the web and catching up on events occurring around the world.