Recently, two seemingly paradoxical headlines about the Japanese economy caught people's attention. First, Japan's GDP was surpassed by Germany's in 2023. That means Japan has fallen to the world's fourth-largest economy, 13 years after China overtook what had long been its second-largest economy in 2010. And yet the Japanese stock market continues to boom and has even reached a historic record with the Nikkei index rising above 40,000. This was even higher than the peak in 1989, just before the bubble burst.
The fact that these two headlines are happening at the same time might be puzzling. Is the Japanese economy in good shape or bad? How should people understand these contradictory phenomena?
To be fair, it must be mentioned that nominal GDP is influenced by the exchange rate. Given that the Japanese yen has depreciated nearly 30 percent against the U.S. dollar over the past decade, its GDP calculation would certainly shrink.
However, that doesn't necessarily mean that the Japanese economy is secretly doing better than the German one. IMF data shows that Japan's average annual real growth rate from 2000 to 2022 was just 0.7 percent, while Germany's was 1.2 percent. As a result, Japan's GDP grew only about 10 percent over the past two decades, while Germany's GDP almost doubled.
Meanwhile, Japan's labor productivity – measured by the value of goods or services a worker can produce per hour – ranked 30th among the 38 OECD countries in 2022 and the lowest among advanced G-7 countries. Japan's labor productivity is only 60 percent of Germany's, second only to the United States. This is why Germany's GDP can be on par with Japan's, even though its population is only two-thirds of Japan's.
There are other worrying indicators for the Japanese economy. Japan's nominal GDP per capita was $34,064 in 2022, ranking it 21st among the 38 OECD member states – a record low for Japan. Furthermore, Japan's GDP accounted for only 4.2 percent of the global economy in 2022, which is also the lowest percentage since the 1980s. In the last quarter of 2023, private consumption and business investment fell by 0.4 percent and 0.1 percent, respectively, compared to the previous quarter.
Why is the stock market soaring in such a difficult economic climate?
The main reason for this is that many large Japanese companies are doing well thanks to the weak yen. Companies like Toyota benefit significantly from the devaluation of the yen; These companies are setting records in profit and market value.
Another important reason for the booming stock market is the increasing investment from abroad. Investors like Warren Buffett continue to pump money into the Japanese stock market as the returns are good. Domestically, the Japanese government is also encouraging people to invest with the new NISA guidelines.
Does the stock increase indicate a prosperous economy in today's Japan? The answer is a clear no.
The weak yen is a double-edged sword. While it brings huge profits for export-oriented companies, it also causes import-oriented companies that rely heavily on foreign energy, food and materials to suffer greatly. Large companies may win the game, but most small and medium-sized businesses (SMEs) do not.
The biggest dilemma for the Japanese economy is currently the collapse in consumption. And this is mainly because the wages of ordinary workers have remained almost at the same level over the last three decades. This is unusual for an advanced economy. Although large companies have increased their employees' wages at the request of the government, most SMEs are reluctant to do so.
Due to the Bank of Japan's continuous deregulation of financial markets, the Japanese economy has gradually shifted from deflation to inflation in recent years. Raw material prices are rising sharply. However, salary increases for ordinary people are not keeping pace.
Inflation is expected to be around 3 percent this year, while newly released data showed real wages fell 0.6 percent year-on-year in January 2024. This trend would not only slow down individual consumption, but also lead to a loss of human resources. There are reports that many Japanese professionals are migrating to the United States and Europe because they can receive much higher salaries doing similar work.
The stock market has been gradually driven to new highs over the last decade by Abenomics. Prime Minister Kishida Fumio's economic policies have essentially inherited Abenomics. Although the Kishida government has drawn up its action plan for a “new capitalism” focused on both growth and wealth redistribution, there is little sign that the underlying problems will be resolved any time soon.
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