By Aidan Sweeney

From the 1950’s to the 1980’s Japan’s economy was flourishing, and at one point thought to be capable of overtaking the United States. Japan was so economically prosperous that companies and managers started trying to mimic Japan’s management style in the hopes that they too could profit greatly. But somewhere along the line this economic prosperity went wrong. In the late 1980’s Japan entered a recession, one which its economy is still suffering from today and will continue to feel the effects of into the near future. 

The cause of this horrible recession that prevented Japan from becoming the world’s number one economy was an overvaluation bubble. Its economy, stock market, and real estate market were all overvalued, so when this overvaluation bubble popped, its economy fell into a slump. What followed was the Bank of Japan following the standard procedure a developed country’s central bank would normally take. But despite the Bank of Japan following the right steps, the economy still did poorly. 

One main reason it did poorly was that private Japanese banks forgave parts or the entirety of the loans they made to Japanese companies. They did this out of fear that if these banks defaulted, they too would feel the financial costs of asking for the debt to be paid. Most banks tend to never forgive loans and always want them to be paid back. A large portion of these companies, whose loans the private Japanese banks forgave, were essentially useless as they were not very productive. 

As a result, the Japanese economy consisted of a lot of useless companies that did not produce anything productive. This ended up causing these companies to act as a burden, hindering economic growth. In addition to these unproductive Japanese companies, there would be unproductive workers in all kinds of companies that would essentially just weigh down the company. What this ultimately connects to is the work culture in Japan in which Japanese companies and workers are not very innovative, hindering economic and technological progress. 

A major part of this continued underperformance was a lack of spending. In a normal scenario, in which there is not a recession, it is encouraged to save more than one is spending. It is the kind of common sense that is instilled in most children at a young age. When an economy is in a recession, it is necessary to spend more money than one saves, because that will encourage the economy to grow and help lift out of recession.

What the Japanese citizens and companies did was basically the opposite. They ended up saving more than they spent, which prevented the kind of economic growth that would help ease the economy out of its dire state. The accumulation of these factors, along with many others, helped contribute to the negative and slow growth rates that made it harder for Japan to recover from its recessions. The 2008 Financial crisis was of no help either.

In the year 1988, the growth rate for Japan was 6.7% and its GDP was $3.13 Trillion (USD). Following 1988, the growth rate began to decrease and at a few significant points became negative. Even though the growth rate slowed and became negative, its GDP continued to grow. That is until it reached $6.27 Trillion (USD) in 2012 and its GDP afterwards started to fall to where it is in 2024 at 4.07 Trillion (USD). Its growth rate for 2024 was 0.3%. 

Today Japan is doing better than it has been in the past. It has somewhat pulled itself out of the long lasting effects of its past recessions and is forecasted to experience a rise in GDP. It is also predicted that its growth rate will continue to be positive, although still at a small rate. The GII (Global Innovation Index), an index that measures the innovation levels of a country, ranks Japan as the 13th most innovative country as of 2024. This is a big positive for Japan. 

The country is home to many top companies like Toyota, Mitsubishi, Itochu, Honda, and many others. It has even attracted the attention and investment of the famous investor Warren Buffet, who had his firm Berkshire Hathaway invest in Japan.

At a glance, Japan’s 2024 economy would seem to be finally tossing off the lingering effects of its past recessions and see a large economic prosperity return to the country. But behind all of this innovation, positive numbers, and investment, lies a deep and important problem. Japan’s population has been decreasing for some time with a birth rate of 1.26 births per woman and a senior citizen population that makes up over 30% of people in Japan. 

This decreasing birth rate, one of the lowest in the world, is a big threat to Japan’s economy. While the effect may not be immediate, its population is expected to fall from 123.87 million to 87 million by 2070. In the future this will pose a major problem for Japan’s workforce, and cause not only the end of the economy, but of the country itself. It should be noted that for the short term, Japan’s population and country should be relatively stable as it will probably still have a large enough population to function. 

Overall the population problem is a major issue for Japan, but it is not one that would cause Japan to collapse in the next hundred years. Given the recent rise in AI and the strong likelihood of advancement of technology, it is possible that Japan’s population problem may not be the end of the country. If technology advances enough, especially in Japan, then it is possible that the country could run on automation and advanced technology, replacing the need for a large workforce. 

Japan’s economy has been through a lot and has missed the opportunity to become the world’s number one economy. But that does not mean the country won’t be able to prosper in the future. Japan is a shaky bet when it comes to investment in its government bonds, but stocks are likely a safe, if not great option, for investors to consider. Even more so since Warren Buffett’s significant interest in the country. Japan will likely not become a top three economy again, but its future may still hold hope for it to remain an important part of the world economy and political atmosphere.

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