“Japan’s workforce will shrink by almost 13m people in the next twenty years without urgent action to increase the number of working women and older workers, according to figures that lay bare the demographic challenge for business. According to new projections by the country’s health ministry, the Japanese workforce will drop from 65.3m in 2017 to 52.5m in 2040, a fall of 22 per cent. The ministry has not produced such long-range forecasts before.” (Robin Harding, Financial Times, January 15, 2019)

In view of its absolute size, i.e. the third largest economy after the US and China, Japan’s economic management and performance plays a significant role in the global economic scene.

Japan’s economy has been involved in a relatively strong expansion since 2012, and the OECD expects its real GDP to expand by 1% this year and 0.7% in 2020.

Japan’s problem in the job market is a severe shortage of workers, and unlike other countries with near full employment, is quite unwilling to turn to immigration to solve this problem.  

However, Japan has two serious structural economic problems - a fiscal one partly tied to the economy’s long-term slow growth trajectory and of course its well-known worry about price deflation.  

Japan has the largest public debt in the developed world of 223% of GDP, and a rapidly aging population both of which could pose serious problems and underscore the need for an increase in tax revenues.

Thus, Japan is set to raise its consumption tax rate from 8% to 10% on October 1st of this year. In order to prevent a repeat of the collapse in consumer spending which occurred in reaction to a previous tax hike, the government also approved a large consumer and retail stimulus, including retail vouchers for low-income shoppers and families. As well, a new, reduced consumption tax rate of 8% will be introduced for basic foodstuffs.

The latest consumption tax increase is part of two-stage process; the first was an increase from 5% to 8% in 2014 which tipped the country into recession. The second and latest tax rise has already been postponed twice.

As a result of its rapidly ageing society, Japan’s labour force is still declining and like other industrial countries, Japan feels it needs to boost productivity.

As is evident in the charts below, Japan is no longer in a serious deflationary environment, though price inflation is not expected to reach its 2% goal either this year or in 2020.

As matters currently stand, Japan’s monetary policy will continue to be expansionary until the 2% inflation target is achieved.

Japan’s Annual Real GDP Growth Over The Past Decade

Japan’s Government Indebtedness And Fiscal Problems

Japan’s Ageing Society Provides Serious Economic Challenges

A Summary Of Recent Economic Indicators For Japan -  GDP. Unemployment, Industrial Production and Consumer Prices