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Economic Challenges and Climbs Facing by Japan in 2022

By Juwai, 18 January 2023
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Looking into 2022, Japan's economy faces several challenges, like keeping the economic recovery going, diversifying investments away from China, and addressing demographic problems.

 

Keeping the Recovery Going

As is the case with other developed countries around the world, Japan's policymakers have been trying to keep the economic recovery going with fiscal stimuli, like a $1 trillion stimulus ​package that the Japanese government instituted in the spring of 2021, which Kishida, has agreed to continue and supplement with a new $944 billion budget for fiscal 2022.3

But keeping the economic recovery going hasn't been accessible around the world due to the supply chain bottlenecks and labour market frictions, which create temporary mismatches between the demand and supply side of the economy. As a result, economic growth has slowed down, as prices of goods and services spike, especially the cost of food and energy.
 
While rising food and energy prices are a problem for every country, it's even more severe for Japan, which is highly dependent on oil imports for its energy needs. High oil prices take a big chunk of household budgets, depressing further consumer spending, the primary factor behind the country's three-decade-old stagnation.4 Nonetheless, overall inflation remains low, verging on deflation. Consumer prices rose at an annual rate of 0.1% in October, the same as in September, and well below the 2% Bank of Japan target, which it has struggled to meet for years.5
 

Diversifying Investments Away From China

For years, China was a focus of manufacturing investment for Japan. China's cheap labour force provided a solution to Japan's labour shortage, helping its manufacturers stay competitive in the global economy. Meanwhile, China became a significant market for Japanese products.

In recent years, things have changed for a couple of reasons. One of them is that China's labour is no longer cheap, as the country is facing labour shortages, eroding its competitive advantage. In 2018, China's manufacturing labour cost $5.51 per hour, well above $4.45 in Mexico and $2.73 in Vietnam.6
Secondly, renewed tensions between the two countries over China's aggressive expansion in the South China Sea and military exercises near Taiwan.
 

Addressing Japan's Demographic Problem

Demographics is a chronic social and economic problem for Japan. Since the 1970s, birth rates in Japan have plunged.7 This means fewer young people are entering the labour force leading to a decline in the country's productive potential.

The lack of young people and very long lifespans create a very unfavourable dependency ratio. That's the ratio of people paying into the country's social security fund to the number of retired people collecting from it. As a result, the social security fund runs deficits, which the Japanese government must cover from its fiscal budget. For instance, the 2022 budgetary budget allocates 660 billion yen to make up for a shortfall in the social security fund, up from an initial estimate of 480 billion yen.8 This shortfall is covered by issuing debt, and Japan's national debt is currently at 266% of GDP, the highest ratio in the developed world9
 
But addressing demographic problems isn't something that can be addressed quickly or easily. It requires structural changes to the Japanese economy and immigration system.10
 

The Bottom Line: Outlook for Japan

Japan faces both cyclical and structural challenges as it begins the new year. Its cyclical challenges are global supply chain bottlenecks and labour market frictions, which continue to put downward pressure on its economy as it strives to recover from the worldwide recession.

Structural challenges are associated with the three-decades-long economic slowdown related to the burst of multiple asset bubbles in 1990 and a decline in the birthrate, which created labour shortages and an unfavourable dependency ratio.
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