Japan experienced the ‘bubble economy’ throughout the 1980s, followed by its subsequent burst in the early 1990s. For nearly 20 years after that, it suffered from economic stagnation indicated by repeated negative economic growth and long-term deflation, often called the lost two decades. Japan’s bubble experience provides a valuable lesson about the limitations of trying to revive the economy solely through macroeconomic policies while ignoring structural reforms.
Today, despite concerns about the arrival of the ninth wave of the COVID-19 crisis, the Japanese economy is recovering and returning to its pre-COVID situation. In May 2023, the government downgraded the classification of COVID-19 infections to Class 5, which is the same category as seasonal influenza. As a sign of Japan’s economic recovery, there have been soaring condominium prices in Tokyo and rising stock prices at the Tokyo Stock Exchange. In June, the Nikkei Stock Average reached 33,000 yen, the highest level since July 1990, during the ‘bubble economy’ period.
The difference between today’s soaring stock prices in Japan and the bubble period is that the Ukraine crisis has led to a rise in the prices of energy and raw materials. This has left the Japanese economy with a different kind of inflationary concern. Stock prices continue to rise due to the ongoing easing of monetary policy.
This raises questions about whether the current surge in stock prices in the Japanese economy is a sign of a temporary bubble that will require an exit strategy in monetary policy. Under Japan’s current economic policy management, the Bank of Japan, led by President Kazuo Ueda — who succeeded former president Haruhiko Kuroda — has maintained a stance of monetary easing. Japan’s public finance also continues to respond haphazardly to various political pressures.
The reality of the Japanese economy is not all roses. According to the Nikkei Shimbun, while Japanese-listed companies posted their highest net profit this fiscal year, their return on equity (ROE) has stalled, with an expected ROE of 9.0 per cent. It is expected to decrease by 0.4 points from Fiscal Year 2022.
Private Japanese companies, especially large firms, promote governance reforms that will lead to improvements in operational efficiency. They are also working to reduce management risks by strengthening constructive dialogue between companies and investors. But these efforts do not immediately improve the profitability of Japanese companies.
The world economy is currently in a period of volatility, uncertainty, complexity and ambiguity. In the midst of economic instability, it is necessary to promote structural reforms and improve the productivity of the Japanese economy in a tangible way to ensure that the rise in stock prices becomes a reliable signal of recovery for Japanese companies.
Japan should promote workplace reforms. Abenomics, which started in 2012, set forth a growth strategy and emphasised the need for structural reform in the labour market. Its reforms, which have been criticised for being insufficient for increasing productivity, were a response to demands for wage increases and the diversification and globalisation of the Japanese economy. Incorporating practices like telework and diverse work styles, which were used during the COVID-19 pandemic, will be beneficial in realising flexible working arrangements and securing a skilled workforce.
Japan should promote reforms that facilitate innovation in both the production and processes of private companies. There are opportunities for Japanese companies to actively employ technologies that are highly versatile and produce high quality products. To facilitate innovation, Japan should promote educational reforms that can consistently supply human capital that will lead to technological progress. Immediate improvements should be made to enhance higher education institutions and improve international competitiveness.
It is necessary to undertake tax and fiscal reforms accompanied by fiscal consolidation that can provide stable support for government policies from a medium- to long-term perspective. The government should not only rely on the growth of companies but should also provide a cooperative environment in which companies can operate efficiently through structural reforms. In promoting these structural reforms, it is necessary to have a global perspective and work to formulate targeted strategies.
The post-COVID recovery of the Japanese economy provides a critical chance, one which will not come around easily in the future. Now is the moment for economic structural reform.