The Japanese Economy’s Position Viewed from a Historical Perspective

Faculty Fellow, RIETI

Historic Turning Point

For me, 2023 has in many ways been reminiscent of the 1930s because of the outbreak of war and signs of spreading conflict as well as the rise of protectionism. Although the images of atrocities committed in the Russian invasion of Ukraine and the Israeli-Palestinian conflict are being projected across the world through news and other media, there does not seem to be a party with the means or willingness to stem the expansion of these conflicts. The situation is also similar to what happened in the 1930s in that existing international organizations are dysfunctional. On the other hand, the thrust of the conflict between the United States and China is about to divide the global economy as it puts other countries in either of the two superpowers’ respective blocs of like-minded nations.

Of course, despite some similarities, the present situation is different from the one that existed in the 1930s in most aspects. However, for me, as someone who teaches the economic history at a university, this development is surprising because conflicts like those underway today are events that we read about in history textbooks, but not something that I imagined would happen during my lifetime. I also have a sense of déjà vu from an historical perspective in terms of not only international political and economic situations but also social circumstances inside and outside Japan and the mindset of the masses.

In that sense, we have reached a critical turning point in history once again. There are concerns that the rapid change that we are now witnessing may lead to more serious developments in 2024 and beyond.

How should Japan deal with this situation?

For better or for worse, Japan is not among the key geopolitical players that can exercise leadership in setting the future course of the international situation, so it has no option but to respond passively while watching other countries’ actions. However, Japan shouldn’t simply avoid involvement in activities that could move the general situation in the wrong direction. It should make proactive efforts to resolve problems while maintaining cooperation with other countries as a major member of the international community. I also look forward to Japan playing an active role not merely on political and diplomatic fronts but also in terms of economic diplomacy efforts by both public and private sectors, including through the Ministry of Economy, Trade and Industry.

Generally speaking, industries and companies crave peace. In particular, major Japanese companies are multinational enterprises engaging in economic activity on a global scale through procurement, production, and sales operations that they conduct around the world. Rising geopolitical risk must be something that they would like to avoid for the sake of business interests. Companies as economic agents through their activities are expected to exercise some kind of risk-hedging function, such as promoting both mutual understanding between countries and recognition of common interests.

Over the course of history, some politicians, journalists, and business institutions and executives, of both past and present ages, have accurately made sense of the atmosphere of the time and come forward to speak their mind. In Japanese economic history, Tanzan Ishibashi is among those who are frequently cited as such an example. In prewar Japan, Ishibashi was a journalist at Toyo Keizai Shinpo, an economic magazine publisher, and later, became president of the company. In the postwar era, Ishibashi served as finance and trade minister under the administrations of Prime Ministers Shigeru Yoshida and Ichiro Hatoyama, respectively. At the end of 1956, he himself became prime minister. In this new age, his profound thought and the actions that he took as a social commentator and critic as well as a thinker, appear to be attracting renewed interest.

I hope that the current situations will be improved moderately with freedom of speech, a principle most cherished by Ishibashi, toward a better direction where true democracy, based on individuals and diversity, is secured.

Keep moving forward without being dissuaded by the atmosphere of negativity

Having taken a broad look at several matters, let us now discuss specifically what we should consider and do for the moment on the economic front in particular. I would like to center that discussion around my message for the Japanese people: “Keep moving forward without being dissuaded by the atmosphere of negativity.”

Studying the economic history forces me to consider our place as individuals among the masses and our precarious position in the ebb and flow of the information we are constantly bombarded with by media organizations. In other words, we are unconsciously controlled by the words and other information to which we are exposed every day, are bound by fixed ideas, and are swayed by overall atmosphere of the times.

Sometimes, the atmosphere of the time injects vitality into the Japanese economy, as in the case of the aspirations that soared in the postwar period of high growth and in the bubble economy era. At other times, it leads to a sense of helplessness like the one that has enveloped Japan since the 1990s, which was referred to as the “lost decade” (which has in fact extended into the “lost few decades”), “a secular stagnation,” and the “Japanization / Japanification.”

Certainly, for around 30 years since the bursting of the economic bubble, Japan’s economic growth rate has remained low, dipping into negative territory in some years, and there is an array of long-running economic problems: consumer sentiment and investment have declined, the outstanding balance of government bonds—that is, the national debt load—has snowballed, and the wage level has remained low. Furthermore, at present, the effects of the recent inflation that has replaced the long years of deflation and the yen’s depreciation due to continued low interest rates are adding to those problems.

The economic crisis that Japan is facing is not merely an economic cycle problem but is fundamentally attributable to institutional fatigue and various structural factors. Phrases like “lost decade(s),” “prolonged period of stagnation” and “Japanization” reflect the understanding that Japan has not made sufficient progress in carrying out structural reforms.

In principle, that understanding is accurate, but we can review the history of this state of crisis, which has been brewing for three decades, with a longer time horizon. From a medium- to long-term perspective, although the Japanese economy has continued to face difficulties for the past 30 years or so, successive governments have tried various economic policies and structural reforms and achieved some results, as have industries and companies.

In Japan and overseas, there have been newspaper and magazine articles with sensational headlines featuring phrases like the “Japanization,” but on closer inspection, some of those articles merely pointed to Japan’s deflation and low growth rate. Although the inflation rate and economic growth rate are part of the fundamentals of the Japanese economy, figures like those are also only a small part of the mass of indicators and targets that matter.

What economic agents, including the government, companies, and households (individuals), should do is to steadily move forward with confidence toward their respective choices and goals without being overly swayed by the words and figures that we hear and see on a daily basis and the general mood that they create.

Even so, for individual agents’ activities to bring benefits to the Japanese economy, communication and discussion among those agencies is essential. Labor-management wage negotiations are an example of such communication, but at a more fundamental level, it is important that policy decisions are made through an open and democratic process. By ensuring that, Japan, upon restoring the fundamental health of society, including the middle class and various other segments, will be able to regain the energy and strength to face the difficulties that confront the international community.

December 22, 2023
>> Original text in Japanese

January 11, 2024

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