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Japan’s economic challenges hint at a frightening prospect

As the nation struggles with several hurdles, the journey ahead appears inevitably marked by a decline
People walk on a pedestrian crossing in Tokyo in this Nov. 16, 2020 file photo. Japan is no longer the world's third largest economy after slipping into fourth place behind Germany recently as the country struggles in a complex web of economic stagnation characterized by a weak yen and diminishing global competitiveness.

People walk on a pedestrian crossing in Tokyo in this Nov. 16, 2020 file photo. Japan is no longer the world's third largest economy after slipping into fourth place behind Germany recently as the country struggles in a complex web of economic stagnation characterized by a weak yen and diminishing global competitiveness. (Photo: AFP)

Published: February 20, 2024 03:12 AM GMT
Updated: February 20, 2024 05:47 AM GMT

Japan was once celebrated as an economic powerhouse, to the extent that in the 1970s, American magazines fueled fears — much as they do today with China — of a Japan poised for global dominance.

However, Japan now grapples with the challenges of a recession.

The world's fourth-largest economy (recently surpassed by Germany), the nation is caught in a complex web of economic stagnation characterized by a weak yen and diminishing global competitiveness in key sectors.

Consider Toyota losing its title for producing the world's best-selling car to an electric vehicle, Tesla, of all cars. It's been already 27 years since the debut of the Prius, first launched in Japan in 1997 and subsequently introduced to the global market in 2000.

As one of the pioneering mass-produced hybrid vehicles, the Prius offered innovative technology that provided a more fuel-efficient and environmentally friendly alternative to conventional gasoline-powered cars.

However, Toyota has fallen behind in the electric vehicle race. While the export sector might momentarily reap the benefits of a weakened yen, this advantage comes with its own set of complications, acting as a double-edged sword.

"The middle class finds itself squeezed, with disposable income shrinking and the cost of living escalating"

While exports flourish, the reliance on these sectors underscores a vulnerability in Japan's economic model. It highlights the nation's dependence on a few industries to prop up its economy, a risky strategy in the face of global economic fluctuations and increasing competition from other countries.

However, a weakened yen also impacts those earning in the local currency, particularly affecting Japan's middle class. As the yen depreciates further, the cost of imported goods and services rises, leading to increased living expenses for the average citizen.

This scenario is particularly harsh for Japan, which relies heavily on imports for energy and food. The middle class finds itself squeezed, with disposable income shrinking and the cost of living escalating, pushing many into a tighter financial corner.

We can laugh at it now, but it was only a few months ago when Japanese media heralded the first significant increase in the average Japanese salaries, a modest rise of a few percentage points that was quickly eclipsed by the inflation rate.

A particularly alarming trend is also the fact that Japan is falling behind in the global race for technological talent.

Despite being the world's fourth-largest economy, Japan ranks 26th globally in annual pay for IT workers. This discrepancy is not just a number; it reflects a deeper issue of Japan's failure to attract and retain top engineering talent.

"Japan serves as a cautionary tale about the complexities of managing a mature economy during a dire population crisis"

Highly-skilled professionals, especially in the IT sector, are crucial for innovation and economic growth in today's digital age. Yet, Japan's inability to offer competitive salaries compared to its peers results in a brain drain, with the best engineers looking elsewhere for opportunities.

This situation is exacerbated by the fact that Japan's tech industry, once a global leader, has been overshadowed by the rapid rise of Silicon Valley and the burgeoning tech hubs in China and India. The consequence is a stagnating tech sector unable to compete on the global stage, hindering Japan's potential for growth and innovation.

The current economic scenario in Japan serves as a cautionary tale about the complexities of managing a mature economy during a dire population crisis.

Only a few countries in the world have demonstrated economic growth and maintained healthy economies despite low birth rates, but those are structurally incomparable to Japan.

We are talking of countries like Singapore, which despite a low birth rate, has continued to experience economic growth. But its success is mainly due to a combination of factors such as high productivity, technological innovation, and effective immigration policies, all things that Japan has not been able to replicate.

As Japan struggles with its economic hurdles amidst a dwindling workforce, the journey ahead appears inevitably marked by a decline.

In response, the government is exploring various strategies to mitigate the negative impacts. These include increasing workforce participation among women and older citizens, implementing policies to boost birth rates (which has never worked), and integrating advanced technologies and robotics to compensate for labor shortages.

Despite these efforts, the task of navigating through these economic challenges remains a frightening prospect.

*The views expressed in this article are those of the author and do not necessarily reflect the official editorial position of UCA News.

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