Recently, two seemingly paradoxical headlines about the Japanese economy have caught people's attention. First, in 2023, Japan's GDP will be surpassed by Germany. In this way, 13 years have passed since Japan overtook China in 2010 and held the second place for a long time, and has fallen to the fourth largest economy in the world. Despite this, the Japanese stock market continued to run wild, with the Nikkei stock average even breaking historical records. Over 40,000. This was even higher than the peak in 1989, just before the bubble burst.
It may be puzzling that these two headlines are happening at the same time. Is the Japanese economy good or bad? How should people understand this contradictory phenomenon?
To be fair, it should be mentioned that nominal GDP is affected by exchange rates. Given that the Japanese yen has depreciated by nearly 30% against the US dollar over the past decade, the GDP calculation will certainly shrink.
However, this does not necessarily mean that Japan's economy is secretly doing better than Germany's. According to IMF data, Japan's average annual real growth rate from 2000 to 2022 was just 0.7%, while Germany's real growth rate was 1.2%. As a result, over the past 20 years Japan's GDP has increased by only about 10%, while Germany's has almost doubled.
Meanwhile, Japan's labor productivity (measured by the value of goods and services that workers can produce per hour) ranks 30th out of 38 OECD countries as of 2022, and among the developed G7 countries. It is the lowest rank. Japan's labor productivity is only 60% of that of Germany, which ranks second after the United States. This is why Germany's GDP is able to catch up with Japan's, even though its population is only two-thirds that of Japan's.
There are even more concerning indicators for the Japanese economy. Japan's nominal GDP per capita will be $34,064 in 2022, ranking 21st out of 38 OECD countries and the lowest ever for Japan. Furthermore, Japan's GDP will account for only 4.2% of the global economy in 2022, which is also the lowest percentage since the 1980s. Personal consumption and capital investment in the final quarter of 2023 decreased by 0.4% and 0.1% from the previous quarter, respectively.
Why is the stock market soaring when economic conditions are so tough?
The main reason for this is that many of Japan's largest companies are doing well thanks to the weaker yen. Companies such as Toyota benefit greatly from the weaker yen. These companies are setting records in profits and market value.
Another big reason why the stock market is booming is the increase in foreign investment. Investors like Warren Buffett continue to pump money into the Japanese stock market because of the good returns. Domestically, the Japanese government is also encouraging people to invest with the new NISA policy.
Do high stock prices indicate the prosperity of Japan's economy today? The answer is a resounding no.
The weak yen is a double-edged sword. It would bring huge profits to export-oriented companies, while inflicting huge losses on import-oriented companies that rely heavily on foreign energy, food and materials. Large companies may be on top of the game, but most small and medium-sized enterprises (SMEs) are not.
The biggest predicament currently facing the Japanese economy is a slump in consumption. And the main reason for this is that wages for ordinary workers have remained at roughly the same level for the past 30 years. This is unusual for a developed economy. Large companies have increased their employees' wages in response to the government's request, but many small and medium-sized enterprises are reluctant to do so.
Due to the Bank of Japan's continued financial deregulation, the Japanese economy has gradually reversed from deflation to inflation in recent years. Product prices are skyrocketing. However, the rise in wages for ordinary people has not kept pace.
Although inflation is expected to be around 3% this year, newly released data shows that real wages in January 2024 were 0.6% lower than the previous year. This trend not only suppresses personal consumption but also leads to an outflow of human resources. There are reports that many skilled Japanese workers are moving to the United States and Europe. This is because they can earn much higher salaries while doing similar work.
Over the past 10 years, Abenomics has gradually pushed the stock market to new highs. Prime Minister Fumio Kishida's economic policies basically inherit Abenomics. Although the Kishida administration has developed a “new capitalism” action plan that emphasizes both growth and wealth redistribution, there is little sign that the fundamental problems will be resolved any time soon.
