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Friday, June 21, 2024

Japan’s economy slips into fourth place after Germany

Japan’s economy has recently been overtaken by Germany, slipping to become the world’s fourth-largest economy.

Recent Economic Performance

The latest Gross Domestic Product (GDP) report shows the fragile state of Japan’s economy. With an increase to -0.1%, against a consensus expectation of 0%, it demonstrates that economic growth is on the edge of stagnation.

Japan’s journey from being a post-war economic miracle to facing a gradual decline in its global economic ranking is a story of reduced competitiveness and productivity. The nation, once renowned for its technological innovation and manufacturing efficiency, has seen a slowdown in these sectors. Globalization has introduced fierce competition from other countries, particularly in industries where Japan used to lead. Moreover, the productivity growth that propelled Japan’s economy in the latter half of the 20th century has not kept pace with that of its rivals, contributing to its slipping economic rank.

Another significant factor in Japan’s economic downturn is its demographic crisis. The country is dealing with an aging population and a declining birth rate, leading to a shrinking workforce. A decrease in the labor force and an increase in the dependency ratio, meaning more people are retiring with fewer young workers to replace them. 

Bank of Japan’s Policy Response

In response to these issues, the Bank of Japan (BOJ) has been implementing monetary policies aimed at stimulating economic growth and price stability. 

The BOJ is maintaining a negative short-term policy interest rate of minus 0.1 percent and ensuring that 10-year Japanese government bond (JGB) yields remain at around zero percent. This approach, known as yield curve control, is designed to keep borrowing costs low for businesses and consumers, thereby encouraging investment and spending.

The BOJ has also decided to continue its large-scale asset purchase program, including buying exchange-traded funds (ETFs), Japan real estate investment trusts (J-REITs), corporate bonds, and commercial paper. These measures are intended to inject liquidity into the financial system, support asset prices, and maintain favorable financing conditions for companies.

Acknowledging the “extremely high uncertainties” surrounding domestic and international economies, the BOJ has emphasized its commitment to patiently continuing with monetary easing while being nimble in its response to economic activity, price developments, and financial conditions. The goal is to achieve the price stability target of 2 percent in a sustainable manner, accompanied by wage increases.

While these measures are important in the short term to support the economy, the path to restoring Japan’s economy and reversing its decline in global ranking requires addressing the structural issues head-on. Reforms in labor market policies, encouraging innovation and productivity, and tackling the demographic crisis through immigration and family-friendly policies are essential for sustainable growth.

Japan’s economic strategy needs to focus on enhancing its competitive edge in emerging technologies and sectors where it can lead globally. Investing in education, research, and development, and nurturing a startup ecosystem could rekindle Japan’s reputation as a powerhouse of innovation.

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Publisher and editor of LJLNews. I am a Stock Market enthusiast, with an interest for politics. I hope you enjoy reading the articles! Contact me at: Lazaruslucas@ljlnews.com

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