Why the Japanese Economy Might Surprise the World

For decades, the Japanese economy has been weighed down by what economists call the "lost 30 years," a period of sluggish growth, demographic decline, and political hesitation. 

Yet veteran strategist Ryoji Musha remains strikingly optimistic. In a wide-ranging JAPAN Forward interview at his Tokyo office, he spoke about the shifting balance of global power. He also discussed why Japan can thrive despite a shrinking population, and how policy choices, not destiny, have held the country back.

Global Shocks, Unexpected Shifts

Musha began by reflecting on how much has changed since he wrote Cheap Nippon Will Bring Japan Back in a Big Way (WAC BUNKO 360, 2022), in which he argues that Japan's "cheap" economy can be a foundation for revival. "At that time," he recalled, "I never imagined China would become so dominant, or that Russia would invade Ukraine. Both were outside the forecast."

Far from being weakened by United States tariffs and sanctions, China's trade surplus has expanded dramatically. In 2018, when President Donald Trump launched his trade war, China's surplus stood at roughly $350 billion. By 2023, it had nearly tripled to $990 billion. Meanwhile, America's external deficit ballooned.

"The US tried to pressure China," Musha said, "but the opposite happened. America's deficit grew while China's surplus grew even larger. US policy failed to achieve its intended effect."

That imbalance is only one measure of Beijing's ascendance. "No one imagined China would command 50% of global steel production, 70% of shipbuilding, 80% of solar and wind, and around two-thirds of the electric vehicle market," he explained. "Its presence in the global economy is like a Frankenstein monster, much bigger and more powerful than anyone foresaw."

For Musha, these realities signal a new world. "Global order is no longer maintained by consensus rules like the World Trade Organization. It requires raw power. That's why Trump's rise was not an accident but part of history's momentum."

Can Japan Outlast China?

In Cheap Nippon, Musha argued that even if China collapsed, Japan's economy would not suffer gravely, since production could shift to other Asian nations. Has his view changed?

"Three years ago, I thought a Chinese collapse was a near-term risk," he admitted. "Now I believe it's unlikely. China's system has become too resilient. Its sheer dominance, he explained, makes it hard to topple. As he put it, "It's over-presence in global manufacturing means it cannot be brought down easily. Still, I think China will face difficulties in the long run."

For Japan, however, those difficulties may be an opportunity. "Japan and China are competitors more than partners," he explained. "If China's presence falls, Japan benefits. Chinese factories often replace Japanese producers in global markets. If they weaken, Japan regains share."

He also downplayed the idea that Japanese companies would suffer if China's vast domestic market shrinks. "Even when companies profit inside China, the money can't really be sent back," he said. "Whatever you make in China is an illusion. It stays there. That is why reducing dependence on China is the smarter long-term business strategy."

The Population 'Myth'

Few issues weigh more heavily on Japan's future than demographics. Yet Musha dismisses the prevailing pessimism.

"The impact of population decline has two parts," he explained. "First, fewer workers. But artificial intelligence (AI) and the new industrial revolution mean companies need fewer workers anyway. Even Microsoft is restructuring. We are entering a time when labor is no longer a bottleneck."

The second issue, he continued, is demand. Here too, Musha is contrarian. "If the population falls 10% but living standards rise 10%, total demand stays the same. It is lifestyle improvement that matters."

So why is the national mood so gloomy? Musha blames the Ministry of Finance. "They told the people: Japan cannot grow because of demographics, therefore taxes and [tax] burdens must rise," he said. "That logic is propaganda, and the media and academics repeated it until the whole nation believed. It created a kind of mass hysteria of pessimism."

For Musha, this belief has been self-fulfilling. "If you think the future is hopeless, you stop investing in Japan and send capital abroad," he argued. "That is exactly why growth stalled. Pessimism created stagnation."

Lessons of the 'Lost 30 Years'

While many see Japan's long stagnation as a tragedy, Musha emphasizes its hidden benefits. "It forced companies to abandon old business models and become more efficient," he said.

In the 1980s, firms chased scale and market share. After the bubble burst, they learned to pursue "only one" strategies, excelling in highly specialized materials, parts, and equipment rather than mass consumer goods. "Japan lost TV sets and PCs but gained global dominance in critical components. That transformation happened because of hardship."

Globalization was another shift. "With weak domestic demand, companies expanded abroad through M&A and became global players," Musha noted. "Hitachi, Sony, Nidec, even SoftBank — all turned into global actors."

Finally, restructuring strengthened balance sheets. Layers of inefficient distribution were swept away. New integrated models like Fast Retailing's UNIQLO emerged, setting world standards. "These business model innovations were not copies," Musha emphasized. "They were creative Japanese responses, and that is very valuable."

Universal Basic Income and AI

Musha argued that universal basic income (UBI) will not arrive all at once, but through gradual steps. "It will not come in a single blow," he said. "It will be formed as a result of many processes."

The driver, in his view, is simple: AI will replace most human labor. "People won't need to work to survive," he explained. "But they will still want higher living standards." That shift, he said, will shorten working hours dramatically and push people into new activities, "and jobs will be created to support those activities."

To illustrate, he turned to history. "Two hundred years ago, 80% of the US workforce was in agriculture. Today it is 1% or 2%," he noted. "Those people didn't become unemployed. They moved into manufacturing, and then into services like leisure, education, and healthcare. As standards of living rose, new demand appeared." With AI, he warned, a comparable transformation will arrive "much faster, within 20 or 30 years," bringing a "fierce reallocation of jobs and lifestyles."

In that world, UBI becomes essential. "Universal basic income is the bottom line," he said. "It is the minimum guarantee of a livelihood in a society where machines provide the basics." Existing welfare systems, he argued, are "the forerunner of universal basic income," and the challenge now is to "generalize and develop" them.

Raising Living Standards

Musha emphasized that this is neither an expansion of social services nor a radical political project. "It is not socialism, and it is not a leftist idea," he said. "It is simply a necessity that arises from technological change and the roles of government and the market." He pointed out that even libertarian figures such as Peter Thiel and Elon Musk have endorsed the concept.

Ultimately, Musha believes, a minimum standard of living should be guaranteed for everyone. "Work will still exist," he stressed, "but its role will be to raise living standards further, and people will be compensated according to their contribution." The challenge, he concluded, is nothing less than to "rebuild the economic system" for that future.

Fiscal Policy and Market Weakness

Why has Japan's recovery lagged behind global markets? Musha points squarely at fiscal policy. "The best consumption in Japan was in early 2014. Since then, life has only gotten worse," he said. The culprit: rising taxes and social burdens.

Between 2011 and today, he calculates, the national burden rate rose from 38% to 48%. "This excessive taxation has hit households while corporate and government revenues rise with inflation. Real incomes stagnate, but taxes climb. That divergence is Japan's biggest problem."

He is critical of Prime Minister Shigeru Ishiba's approach, which he sees as continuing the same policies. "It is not sustainable. What markets want is the expectation of change."

A Bold Market Forecast

On Japanese equities, Musha is unabashedly bullish. He argues they remain undervalued, with vast household cash deposits waiting to shift into stocks. "If people realize equities yield 6% versus 1.5% on bonds, money will flow into shares," he said.

Corporate buybacks are another driver, already worth trillions of JPY (tens of billions in USD) annually. Combined with global investors seeking value, Musha believes the Nikkei Average could soar. "In ten years, 50,000 or even 100,000 is possible," he predicted.

The reason is structural: "Equity value has become the measure of national power. America shows how high valuations fuel growth. Japan, with its strong conditions for equity capitalism, can do the same."

An Optimist Against the Tide

Musha knows his optimism goes against the grain of mainstream commentary. But he insists Japan's challenges are not destiny. "The belief that demographics doom Japan is like a religion," he said. "What matters is policy, innovation, and confidence."

Musha's takeaway is simple: pessimism breeds decline, while optimism can create its own future. "If people choose to believe in growth, Japan's best days are still ahead."

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Author: Daniel Manning