Japanese Economy

Toward Society 5.0

With new state intervention targeting digitisation, Japan will further enhance its position as a leading nation for innovation. The Japanese vision of Society 5.0, in which information technology and artificial intelligence are inspired by the need for both GDP growth and the amelioration of the consequences of an ageing population.

The Japanese economy is slowly but steadily recovering from the challenges posed by the prolonged pandemic. In December 2020, the Japanese government announced a massive economic stimulus package that must provide particular support to environmental measures and digitisation. Japan has the world’s largest electronics goods industry and is often ranked among the world’s most innovative countries, while the new state package may further help the country in retaining that position.

Japan’s budget allocations for innovation activities was 3.8 trillion yen (US$35 billion) in 2018 and 4.2 trillion yen (US$38 billion) in 2019. Spurred by such a political driving force, Japan’s investment in the development and application of digital technologies, as well as in basic research, has consistently received significant boosts.

In the face of increasing competition from China and South Korea, manufacturing in Japan is today focused primarily on high-tech and precision goods, including hybrid vehicles and robotics. Many expect that the post-COVID-19 world will further emphasise the importance of digital transformation, strong R&D and innovation, as major growth drivers.

According to the latest IMF report, global growth is expected to shift back from negative to positive (-4.4 to +5.2%), and Japan is expected to see positive growth (-5.3 to +2.3%), albeit at a slower pace of recovery.

Despite positive outlooks, experts believe that emerging from the crisis will be a tough job even for the most advanced economies. According to a conservative forecast by the Japan Centre for Economic Research, it will take four years for the economy to return to its pre-COVID-19 state.

Credit rating agencies in Japan are maintaining the ratings of companies with rising debt. As a result, there has been no change in corporate ratings even with the economic downturn. According to economists, this means that banks’ bad debts have been kept in check without increasing. Obviously, some companies may face huge over indebtedness, while experts warn that some industries – in particular the aviation and similar industries – need public capital injections.

The Japanese government is slightly more optimistic than the private sector. Foreign demand is strong and gives hope that Japan’s economy will receive a strong boost, which is good news given that domestic demand is low as consumers remain cautious. As noted, a growing trade surplus accounted for more than half of Japan’s Q3 2020 rebound in real GDP, and helped reverse two consecutive quarters of declines. There are also expectations that the Regional Comprehensive Economic Partnership – a free trade deal between ASEAN countries, Japan, China, Australia, New Zealand, and South Korea – will further boost exports as tariff reductions are phased in gradually. Japan is also providing subsidies to companies that will build factories in Japan or Southeast Asia in an effort to diversify production away from China. It could also support Japanese exports.

Still, the Japanese government has a lot to think about when facing some of the long term challenges. Japan’s population is ageing and shrinking fast. With a median age of 48.4, Japan’s population is the world’s oldest. The government of Japan projects that, by 2060, there will be almost one elderly person for each person of working age.

There are expectations that the new Regional Comprehensive Economic Partnership – a free trade deal between ASEAN countries, Japan, China, Australia, New Zealand, and South Korea – will further boost strong export figures for Japan’s economy

As projections show, over the same 40-year period Japan’s current population of 127 million will shrink by over a quarter, while the accelerated speed of ageing and shrinking of its population will pose economic and other challenges for the country.

As the IMF points out, the ageing and shrinking population will strain Japan’s public finances, as age-related spending—such as on healthcare and pensions—rises as the tax base shrinks.

As a result of these growing challenges, Japan needs to strengthen the mutually-reinforcing policies of “Abenomics”—including monetary easing, flexible fiscal policy and structural reforms (particularly labour market reforms). The IMF suggests that this comprehensive set of policies is needed to boost potential economic growth, lift inflation to meet the inflation target of the Bank of Japan and stabilise public debt.

This requires an accommodative monetary policy stance, including by maintaining the Bank of Japan’s short- and long-term interest rate targets to support growth and inflation, increased efforts aimed at maintaining financial stability, combined with supportive near-term stimulus and long term structural reforms, particularly in the area of labour-market reforms. This is the top priority, as these moves can deliver the most gains in terms of growth and supporting higher inflation. Among them are Increasing training and career opportunities for workers without lifetime employment, most of whom are women. Furthermore, reforms have to encompass older workers and foreign workers. In the case of the first (women), increasing the availability of childcare services will support women’s participation in the labour force. In the case of the second, abolishing firms’ right to set a mandatory retirement age will support older workers.

Some of the classical economic measures deployed include product and service sector deregulation, reforms of small- and medium-sized enterprises, and corporate governance reforms. Those may in turn lift productivity and investment. Reforms to further liberalise trade and promote foreign direct investment will further support investment and growth in Japan.

The IMF believes that almost 60 per cent of the predicted demographic- driven growth slowdown might be eased by the proposed set of reforms. Moreover, automation can also help mitigate the challenges brought by an ageing and shrinking population, particularly automation in healthcare, transportation, infrastructure and fintech.

Indeed, as of 2016, Society 5.0 (which stands for a super-smart society) has represented the big societal transformation plan of Japan. While Industry 4.0 envisages the digital transformation of manufacturing, Society 5.0 aims to tackle several challenges by going far beyond just the digitisation of the economy towards digitisation across all levels of Japanese society and the (digital) transformation of society itself.

Five key themes are next generation mobility/smart city, smart public services, next-generation infrastructure, FinTech (financial technology)/cashless society and next generation healthcare.


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