EDITORIAL | Can the Japanese Economy Finally Escape the Twilight Zone?

The massive earthquake that struck the Noto Peninsula in Ishikawa Prefecture on New Year's Day could have a huge impact on the Japanese economy. If the chaos caused by such things as disruption of logistics and stagnation in production spreads in the future, it will not only be a blow to the disaster-affected areas but also to the nation's economy as a whole.

The supply chain that supports corporate activities covers all of Japan. It covers the Hokuriku region, which includes the earthquake zone. Japan is undeniably an earthquake-prone country, and earthquake risk may impact inbound numbers as some foreigners become reluctant to visit Japan. 

It is important to figure out how to dispel such concerns. The whole country must make every effort to recover and rebuild from the earthquake. But, first of all, we must keep in mind that such recovery is a major premise for the sturdy development of the Japanese economy. 

Escaping Long-Term Stagnation 

In terms of the domestic economy as a whole, it is clear that 2024 will be a critical year. In expressing his New Year's wishes, Prime Minister Fumio Kishida declared, "I want to make 2024 the year in which we break completely free of the deflationary mindset and orientation towards shrinking through cost-cutting that has enveloped the Japanese economy." We heartily agree with his recognition of the essence of the problem. 

Even if people can maintain their daily lifestyle, it is difficult to hope to become more affluent. Japan has been mired in a long-term period of stagnation since the collapse of the "bubble economy." This has come to be referred to as the "lost 30 years." The question is whether we can truly escape from this twilight zone. 

Looking back, it is obvious that globally the perceived importance of the Japanese economy has declined over the past 30 years. In autumn 2023, the International Monetary Fund forecast that Japan's GDP would drop below that of Germany by the end of the year. That meant it would have become the fourth-largest economy in the world. Granted, since the IMF's GDP ranking is dollar-based, the figures for Japan have declined due to the weak yen. Even allowing for that, the downward trend continues. 

Burden on the Working Generation

Now, in terms of per capita GDP, South Korea and some other countries are closing in on Japan. In Japan's case, it is now undeniably a fast-aging society. Therefore, it has been pointed out that the growth rate of GDP per capita is still quite high if we look at the working-age population rather than the total population. Nonetheless, the burden of paying for the social security needed to support an aging society falls on this same working generation. We must face up to this reality and achieve economic revitalization. 

There is no denying that the key must be wage gains through the spring labor offensive (shunto) and other means. Up until now, Japanese companies have focused on reducing labor costs and lowering the prices of products and services. Currently, prices continue to rise for a wide range of items. Coupled with the labor shortage, the momentum for wage increases has increased. 

The conventional wisdom that takes cheap wages for granted is being shaken. We need to ensure that this trend takes hold by raising wages to keep up with rising prices. 

Wage Hikes and Labor Cost

Wage increases at small- and medium-sized businesses are especially critical. Many small and medium-sized enterprises that do business with large companies are unable to pass on increases in costs. For example, they cannot compensate for labor and raw material costs by adjusting their prices. That is because large companies making the orders have the upper hand when it comes to pricing. If this imbalance is left unaddressed, wage increases will not spread. 

In November 2023, the Japan Fair Trade Commission issued guidelines stipulating that the ordering and receiving parties should regularly discuss the reflection of labor costs in prices. Of course, these rules should be complied with. But, in addition, we would like to see full utilization of measures such as the wage increase tax incentive system. Moreover, we otherwise strongly encourage small and medium-sized enterprises to raise wages.

Cautiously Exiting Monetary Easing 

Another thing that seems to be reaching a turning point is the monetary easing measures of the Bank of Japan (BOJ). 

Central banks in Western countries implemented monetary easing policies in the wake of the Lehman Shock and during the COVID-19 pandemic. But after these crises had passed, they all began raising interest rates. Meanwhile, the BOJ has consistently maintained large-scale easing. This is because Japan cannot escape the albatross of being unable to expect strong growth even though there may be a gradual economic recovery. 

However, recent inflation rates have exceeded the Bank of Japan's 2% target and are now putting upward pressure on long-term interest rates. Many observers predict a full-fledged shift in terms of easing measures, including the lifting of the negative interest rate policy. It would be natural for the Bank of Japan to consider an exit strategy toward normalization. Meanwhile, it should take into account factors such as side effects of easing that might distort market functions. 

Careful judgment will be required in such situations. The BOJ is poised to cautiously assess trends in wage increases before deciding on policy changes. But is there still a risk of a return to deflation? Will the government join the BOJ in declaring that a full escape from deflation has been achieved? Communication between the government and the BOJ on these points is essential. 

A Virtuous Cycle

If a shift away from large-scale easing leads to a "world with interest rates," corporate borrowing rates will rise. That in turn should stimulate the "metabolisms" within companies. The most important thing to watch will be how private companies respond to changes in the economic and financial environment.

The same goes for attracting talented people through wage increases and other incentives. It is also desirable to increase labor productivity through digitalization and labor-saving investments, while actively investing in growth fields. Hopefully, such private sector-led initiatives will lead to a new virtuous economic cycle.

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(Read the editorial in Japanese.)

Author: Editorial Board, The Sankei Shimbun