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Japanese Economy

Japan Rapidly Approaching “Society 5.0”

According to a Kyodo News survey, around 84% of major companies in Japan expect the country’s economy to grow in 2022. This coincides with the expectations of many analysts, who anticipate the rebound of Japan’s economy. In the longer run, Japan is moving rapidly towards “Society 5.0”, which will underpin the country’s plans to enter a new phase of building a more equitable, technology-driven society

Japan has one of the world’s largest and most developed economies. It previously occupied second place in terms of assets and wealth (behind the U.S.), until China took that spot in 2015. Japan now has the world’s third-largest economy, in terms of nominal GDP, and the fourth-largest in terms of purchasing power parity. It is the world’s second-largest developed economy, with per capita GDP (PPP) having stood at $41,637 in 2020.

Furthermore, Japan is the world’s fourth- largest importer and fourth-largest exporter (based on 2018 results), while it has the world’s second-largest foreign exchange reserves, worth $1.3 trillion. Japan is also the world’s third-largest consumer market.

With its well-educated, industrious workforce, the country dominates many advanced industries. For example, it is the world’s third-largest automobile manufacturing country and one of the world’s most innovative countries. It focuses on the manufacturing of high-tech and precision goods, such as optical instruments, hybrid vehicles and robotics. Primary industries, including agriculture, account for just one per cent of Japan’s GDP. A total of 51 Fortune Global 500 companies are based in Japan.

According to the latest government announcements, Japan intends to push for a green and digital transformation as part of its efforts to make the society more equitable. According to Prime Minister Fumio Kishida, “Japan is determined to lead the global trend with a new form of capitalism and to demonstrate how capitalism can evolve, as Japan assumes the Group of Seven presidency next year”. Japan also hopes to create a “zero-emissions” com munity in Asia, by promoting the use of hydrogen and other green energy sources.

Primary industries, including agriculture, account for just one per cent of Japan’s GDP. A total of 51 Fortune Global 500 companies are based in Japan.

The country’s economy was hit hard in 2020-21 by the Covid-19 pandemic, with real GDP contracting at an annualised rate of over 32% in the second quarter of 2020, before recovering by just over 20% in the next quarter, with more ups and downs coming over the subsequent few quarters. As of Q3 2021, Japan’s GDP was still below pre-pandemic levels.

However, the economic is expected to continue its recovery in 2022, while Japan is diversifying investments away from China and addressing some of its long-term problems, such as a low birth-rate and an aging population, given that China is no longer a source of cheap labour that enables Japan to maintain the competitive price of its products in the global economy. As an example, in 2018 China’s manufacturing labour costs were $5.51 dollars per hour, compared to $2.73 in Vietnam.

Analysts note that Japan is facing both cyclical and structural challenges in 2022. The cyclical ones refer to the aforementioned global supply chain bottlenecks and labour market frictions. Among the structural challenges is Japan’s well-known inability to emerge from its three-decade- long economic slowdown. In 2021, the Government provided a $1 trillion infusion as a stimulus package to the economy, which will be followed by an additional $944 billion budget for fiscal year 2022.

It remains to be seen how recovery plans will affected by the supply chain bottlenecks and labour market frictions that create temporary mismatches between the demand and supply side of the economy. Rising food and energy prices are a particular problem for Japan, as it is highly dependent on oil imports to cater for its energy needs. Nonetheless, overall inflation still remains low.

Moving towards “Society 5.0”

As noted, Japan has a highly innovative economy. According to the government’s official website, Japan is moving rapidly towards “Society 5.0”, a new ultra-smart society where all things will be connected through IoT technology and all technologies will be integrated, serving to improving quality of life dramatically.

The Government of Japan is focused on encouraging various players, including start-ups and “hidden gems” among SMEs, to come up with brand-new and innovative ideas to provide the world with solutions.

Implementing the Internet of Things (IoT) in business requires huge initial investment, yet the invention of cloud-based platforms (an invention of one of Japan’s start-ups) reduces the cost significantly by replacing core physical IoT infrastructure with a cloud-based service, thus creating opportunities for smaller companies to launch creative and innovative IoT products and services, democratising the IoT.

Other start-ups are focused on improving personal mobility and mobility infrastructure for last mile transportation; digital farming technology to help farmers use water and fertilisers more efficiently. By utilising the IoT and Artificial Intelligence to collect and analyse data from their farming practises and the surrounding environment, this technology enables even inexperienced crop farmers to implement such intangible techniques. This technology is expected to bring a huge change to the future of sustainable agriculture.

There are also Japanese start-ups focused on data exchanges via satellites through the development of cloud-based solutions to connect ground station antennas scattered around the world and enabling them to handle frequent data transmissions.

They are also exploring new approaches to develop medical treatments with fewer side effects and employ technologies that will shorten processes to develop new medicines dramatically and allow them to be sold at significantly lower prices.

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