Revitalization of Japan’s Economy: Make Leap toward Growth-Oriented Economy / Benefit Households by Breaking Prolonged Stagnation

Editorial

16:29 JST, January 10, 2025

Will Japan be able to make a smooth transition to a growth-oriented economy led by high wages and active investment and completely break free of deflation? This year, the nation’s power will be tested.

The potential of Japanese companies should be high. It is hoped that they will not just avoid risks but will take bold steps toward a growth strategy.

Shift to aggressive investment

What is needed now for Japan to transform itself into a growth-oriented economy is a change in the mindset of top management.

During the long period of stagnation known as the “lost 30 years” following the bursting of the bubble economy, Japanese companies have focused so much on cutting costs to make products more cheaply that they have not sufficiently created new hit products or groundbreaking services.

In the meantime, U.S. tech giants such as Google LLC and Apple Inc. have achieved phenomenal growth, and China has taken the world by storm with its solar power generation equipment, electric vehicles and other products for decarbonization.

Japanese companies should also feel a sense of urgency that, if they do not accelerate their pace of growth, they will be left behind.

The Nikkei Stock Average last year surpassed the previous record set in the bubble era, exceeding 40,000 and breaking free from a prolonged spell of stagnation.

However, internal reserves held by corporations reached a record high of about ¥600 trillion at the end of last fiscal year, and they are not actively channeling the funds into investments.

Now is the time for companies to utilize their internal reserves and take an aggressive stance.

The wave of change is already arriving. Honda Motor Co. and Nissan Motor Co. have entered into talks to merge their operations, a move pushed by emerging EV makers in the United States and China.

There are more than a few areas where there are expectations for Japanese companies to usher in new eras and play leading roles.

NTT Corp. is moving forward with the practical application of next-generation telecommunications infrastructure that consumes significantly less electricity. Mitsubishi Heavy Industries, Ltd. is at the forefront of carbon dioxide capture technology. Japan’s presence is also increasing in the development of quantum computers, a field in which the United States, China and Europe are competing with each other.

The Japanese government should identify promising fields and strengthen its measures in such ways as providing intensive financial support to them.

Critical moment for ending deflation

The Japanese economy is on a path of gradual recovery, but households are struggling with their budgets due to the rising prices of food and other daily necessities. In order to make people’s lives more affluent, it is necessary to increase Japan’s productivity, boost its gross domestic product and grow the economic pie itself for the distribution of wealth.

However, GDP growth has been slow over the past 30 years or so. In dollar terms, Japan has fallen from second to fourth place in the world, having been overtaken by China and Germany. Due to prolonged stagnation, Japan’s share of global GDP has fallen from about 18% in 1995 to about 4%.

Although this is largely due to the depreciation of the yen, the decline in the value of the currency, in some respects, reflects the decline in national strength.

In retrospect, Japan fell into deflation in the late 1990s, when a number of financial institutions went bankrupt.

The fact that Japan has yet to completely break out of deflation is probably the reason for the palpable sense of stagnation.

In order to spread the benefits of growth widely among the public, it is necessary for large corporations to realize high growth, and at the same time the nation must aim for an economy in which the earnings of small and midsize companies, which are responsible for 70% of employment in Japan, are increased.

It is important to allow small and midsize firms to pass increased labor and raw material costs on through their prices so that they can raise wages. The government should also play a strict monitoring role to ensure that happens.

Management also carries a heavy responsibility. They need to continue to implement high wage increases in the shunto spring wage negotiations. If such a virtuous economic cycle is realized, a complete break from deflation will naturally come into view.

Additional interest rate increases are expected by the Bank of Japan this year. In a “world with interest rates,” cash and deposits held by households, which amount to over ¥1 quadrillion, will be invested in the stock and other markets. It will be vital to channel the growth of corporations back to household budgets.

Increase fiscal reserves

As high growth in the Japanese economy is aimed for, fiscal consolidation will become even more important. This is because it is necessary to dispel uncertainty about the future in order to vitalize consumption and prevent further decline in the birth rate.

If the central bank continues to raise interest rates, the burden caused by the nation’s interest payments on outstanding government bonds, which stand at more than ¥1 quadrillion, will also increase.

If Japan’s fiscal conditions, which are at the worst level among major industrialized nations, deteriorate further, there is concern that the country may not be able to allocate sufficient funds for investment in growth, social security and other areas.

Depending on the implementation of the tariff policies of U.S. President-elect Donald Trump, there is also concern that the Japanese economy could fall into recession, and preparations to deal with such a situation must not be neglected.

In order to respond to unforeseen circumstances such as a large-scale natural disaster or a global economic crisis, it is of foundational importance to return fiscal management to “normalcy” during a period of continued economic recovery. The government must chart a medium- to long-term path for fiscal consolidation and increase fiscal reserves.

(From The Yomiuri Shimbun, Jan. 10, 2025)