Minister of Economy, Trade and Industry Yoji Muro (©Sankei by Tomotaka Nakamura)
The Japanese economy is facing a critical moment in its revival. A development that clearly illustrated this fact was in the announcement at the end of 2024 that Honda and Nissan Motor Corporation were entering into merger talks.
After the collapse of the bubble economy, the Japanese economy entered into a period of prolonged stagnation that came to be dubbed the "lost 30 years." But even during these doldrums, the Japanese motor vehicle industry continued to maintain its global competitiveness. It is the auto industry that pulled the economy forward.
With their engine technology as their ace in the hole, Japanese cars were popular with consumers for their low fuel consumption and high reliability. However, the importance of vehicle control software technology has been increasing. Now, due to the electrification of vehicles and other factors, Japan's motor vehicle industry is facing a "once in 100 years" period of major transformation. As a result, the comparative advantage of Japanese cars is declining.
A Strategy to Survive the Upheaval
Newly emerged US and Chinese manufacturers are dominating the electric vehicle market with their price competitiveness and rapid development speed. The fact that Honda and Nissan feel compelled to merge is a stark indication of their sense of crisis that they no longer can compete on their own.
This situation where a winner in an existing business field falls behind when entering a new business is called the "innovator's dilemma." Many companies have fallen into this trap in the past.
Hopefully, all Japanese automakers, not just these two companies, will avoid obsession with past successes. Instead, they must draw up and implement bold strategies to weather this period of great change.
Search for New Growth Industries
The problem is that we currently have no other growth industries to follow the lead of the auto industry.
Many Japanese companies that once shone brightly in the global market have lost their sheen. Japanese companies' decline in competitiveness has coincided with the diminishment of Japan's national power. New growth industries must be created if the Japanese economy is to be revitalized.
There are now high expectations for Rapidus, a company receiving support from the Japanese government. It aims to domestically produce cutting-edge semiconductors. In December 2024, Rapidus began receiving shipments of equipment essential for its manufacturing work. Its prototype line will begin operation this April, marking a major step toward the anticipated start of mass production in 2027.
There has been criticism of the huge government subsidies provided to Rapidus. Absolutely, there should be a transition to private sector leadership as soon as possible. But if the company can supply cutting-edge semiconductors designed with specific applications of customers in mind, such as for self-driving cars, the ambitious venture should have significant ripple effects on domestic industries.
We should not shy away from providing government support when needed.
Make Sure Workers See Benefits
Another element essential for the Japanese economy to get back on the growth track is continued wage increases. After the collapse of the bubble economy, the dark cloud of deflation enveloped the Japanese economy. As prices stagnated, companies curbed wage hikes to secure profits. With incomes stagnating, consumers became more frugal, which in turn led to further declines in prices. For a long time, we were unable to escape this vicious cycle.
However, the prices of raw materials and resources remain high and the yen is weak. In this circumstance, prices continue to rise across a wide range of items. Judging from prices alone, it seems that the Japanese economy is already in a state of inflation.
Passing On Cost Increases Fairly
It is encouraging that companies have begun to prioritize wage hikes. Even so, with price fluctuations, real wages have been unable to stabilize to exceed cost increases in daily goods and services. This situation must change to achieve a virtuous cycle in the economy and escape decisively from deflation.
Wage increases at small and medium-sized enterprises are especially important. They account for 70% of employment in Japan. Achieving that goal assumes that small and medium-sized enterprises will strive to improve their performance, including increasing productivity. At the same time, it is essential that the increased costs incurred by small and medium-sized enterprises, such as raw material and labor costs, be appropriately passed on in their transaction prices.
Such smaller companies are suffering from an acute shortage of workers. Even if their performance is flat, many small and medium-sized enterprises have been forced to implement "defensive wage increases." Without wage hikes, they cannot secure the workers they need.
In the end, it will be the large companies that suffer if they do not help. They need the products of those smaller employers. If the companies they regularly do business with are unable to raise wages and suffer from labor shortages, they will be unable to continue business. This directly affects the well-being of the large companies, too.
The government may also need to step up its monitoring of trade practices to ensure costs are properly passed on.
Donald Trump's Inauguration
On January 20, Donald Trump will be inaugurated as US president. The President-elect has already announced he would impose large increases in tariffs on foreign imports. For Japan, which fears that its domestic market will shrink as its population declines, access to foreign markets remains critical. Consequently, such tariff hikes could have a major impact on the Japanese economy.
The only way for Japanese companies to avoid being at the mercy of the Trump administration's policies is to regain their global competitiveness. The private sector should draw up bold strategies and the government should support them. By strengthening public-private efforts, hopefully, we can ensure the revitalization of the Japanese economy.
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(Read the editorial in Japanese.)
Author: Editorial Board, The Sankei Shimbun
