The Japanese economy is in transition: forces that are shaping its future

US President Joe Biden holds a trilateral meeting with Japanese Prime Minister Fumio Kishida (R) at the White House in Washington, DC on April 11, 2024 Andrew Harnik/Getty Images

Yesterday (April 11), Japanese Prime Minister Fumio Kishida addressed a joint session of the U.S. Congress in a major expression of U.S.-Japan relations. In his remarks, Kishida reiterated his policy of “new form of capitalism” as a means to grow the Japanese economy. “He enjoyed an unusually supportive audience that frequently interrupted his speech with thunderous applause,” Gregory Nasif, who attended Kishida’s speech and currently serves as press secretary to Congresswoman Alma S. Adams, told Braganca.

Despite previous economic hurdles, Japan now hopes for a future of growth. And here are some forces that could shape Japan's future.

Artificial intelligence could help combat the labor shortage

Labor shortages and an aging population are increasing in Japan, but “AI that increases labor productivity can close the gap,” said Hisayku Idekoba, CEO of Recruit Holdings, a global employment agency headquartered in Tokyo, during a fireside chat at a yesterday Event hosted by the Japan Society in New York City.

Japan has the oldest population of any country. According to the United Nations, one in ten Japanese citizens is over 80 years old. Japan has the fastest-shrinking working-age population of any developed economy and one of the lowest birth rates in the world, and as a result is struggling to have the workforce needed to grow its economy. It is estimated that Japan's labor supply will decline by 11 million workers by 2024.

Idekoba said Japan should “fully embrace AI” to deal with this crisis. Japanese companies have long been at the forefront of advanced robotics and automation to address labor shortages, and Idekoba is confident that AI can drive such initiatives.

Japan is finally abolishing negative interest rates

Last month, Japan's central bank voted 7-2 to raise short-term interest rates to 0% to 0.1%, becoming the latest country to eliminate negative interest rates. It was Japan's first interest rate hike in 17 years. The European Central Bank was the first country to introduce negative interest rates in 2014, which ended in 2022. Struggling with growth and deflationary pressures, Japan introduced negative interest rates in 2016 but has had little success in boosting its economy.

The impetus for Japan's move away from negative interest rates was sparked by a 3.7 percent rise in wage growth – driven by increasing labor shortages – and an inflation rate of 2.8 percent. Although it may seem low compared to high inflation in the United States, this number is high for Japan, where inflation has been near or below zero in recent years.

Prime Minister Kishida called it a “once-in-a-lifetime opportunity to escape deflation” in a recent press conference. However, the Japanese government remains cautious, while economists remain unconvinced that this could be a new page for the country. Mikihiro Matsuoka, chief economist at SBI Securities, said in a Financial Times report that Japan's economy is “not yet” normal.

“The US is like Japan 20 years ago.”

“The situation in the U.S. is like Japan 20 years ago,” Idekoba noted during the fireside chat, pointing to a figure showing how the aging population in the U.S. is growing while the working-age population is declining. Idekoba points out that the U.S. has not expanded its workforce in the past two years, only supplementing it with temporary foreign workers.

But the similarities don't end there: Japan first experimented with quantitative easing and loose monetary policy in 2001, which were generally perceived as controversial. This, coupled with a persistent low interest rate environment and high government spending, shows that a country that once promised to become a global economic hegemon is turning to dramatic fiscal and monetary policies to boost growth. Although such measures were controversial two decades ago, they are now commonplace in the United States

Economists have already asked whether the US is turning into Japan; There are similarities, but also dramatic differences.