The Japanese economy is the third-largest economy in the world. Despite its poor public finances and economic stagnation for over a decade, it still has the highest debt-to-GDP ratio among developed countries per Kavan Choksi Japan. The Japanese central bank, Bank of Japan (BOJ), holds a significant portion of government bonds, giving them a tremendous amount of power to print money and control interest rates. The Japanese economy has been going through a unique phase for decades now with a downward trend in population, a high level of public debt, and a lack of natural resources.
With the average life expectancy at 82 years and one of the lowest birth rates globally, Japan’s population is expected to decline by 30 million people from current levels over the next four decades. Till now, the Japanese economy has been able to sustain itself on its exports and investment. The Japanese government has tried several times to boost consumer spending with moderate success. Still, as per the latest data, it seems like Japanese consumers are no longer confident about the future of their country’s economy and have revised downward their expectations for personal finances and the economy.
Unfortunately, the consequences of this pessimistic outlook are already visible in Japan’s retail sales, which fell at their fastest rate in 33 years in December 2021. The Japanese central bank has kept rates low (at 0%) for over ten years now and may cut rates further to boost spending by companies and consumers. The financial woes of European countries have also contributed to the Japanese pessimism. The general public’s lack of confidence in their government has also played a role in the downward spiral that Japan finds itself in today.
However, experts believe that although they face difficult times, Japan is not likely to follow the same path as Greece, which defaulted on its debts and is struggling with austerity policies imposed by the European Central Bank. They also say that Japan may not be as aggressive as China which has been doling out financial support to its citizens and companies alike.
Here are some predictions about the future of the Japanese economy:
1) Low interest rates will go even lower.
BOJ is trying hard to avoid deflation and stoke inflation by printing money (quantitive easing) which has reduced the value of the Yen, increased borrowing costs for businesses and individuals, reduced returns on cash deposits but hasn’t managed to lift inflation or spending.
2) New taxes will be introduced where none existed.
Experts believe that the Japanese government will likely introduce new taxes over the next few years, which will weigh heavily on already low consumer spending. These taxes could target certain activities like gambling, tobacco, and alcohol. In addition, higher-income tax rates may also be introduced for top earners (individuals who earn >¥2 million per year).
3) The birth rate will continue to drop.
Despite the government’s focus on family-friendly policies, it is unlikely that Japan will reverse its trend of falling birth rates anytime soon.