Then came ‘Abenomics’ with its ‘three arrows’, Prime Minister Shinzo Abe’s grand plan to revitalise an economy which – let us not forget – is still the world’s third largest.
" The live question is not so much whether Japan will have a technical recession… but whether the much-needed reform of the economy is on track.”
Many previous such plans had collapsed, throttled by bureaucratic sclerosis, vested interest, a lack of political will and corporate rigidity. But in the final quarter of 2015, Japan’s economy grew.
Abenomics was working. And Japan kept growing for nine quarters straight, the best run for 28 years – until this year.
In the three months to March 31 Japan’s economy shrank at an annualised rate of 0.6 per cent. Whether that’s the end of this run of sunshine is debated – the weight of economic opinion is it’s not, that a rebound is already evident, and the weak quarter had much to do with a particularly bleak winter.
According to Goushi Kataoka, policy board member of the Bank of Japan, in a speech just before the latest data were announced, Japan’s annual real growth rate for 2017 was 1.6 per cent, the highest level since 2013.
“The breakdown by component during this period shows that private business fixed investment and exports are the major driving forces of the growth,” he said. “With regard to the outlook, in fiscal 2018, Japan's economy is likely to continue growing at a pace in the range of 1.0-1.5 per cent, exceeding its potential.
“This is because business fixed investment will increase, reflecting improvements in corporate profits and business sentiment, and exports will rise on the back of robust growth in the global economy. These positive developments will then transmit more strongly than before to households through a rise in wages, which will lead to some acceleration in the pace of growth in private consumption.”
Growth will slow after that, reflecting a consumption tax increase and a peaking in demand related to the 2020 Olympics but the central bank continues to see real growth.
But the live question is not so much whether Japan will have a technical recession this year or next – two successive quarters of negative growth – but whether the much-needed reform of the economy is on track.
There is no doubt Japan needs reform: much of the economy, particularly the domestically focussed sectors, remain unproductive; the working population is shrinking; the nation is ageing; the economy needs to become more global to offset flat domestic opportunity.
Ironically, according to Miki Tsusaka, senior partner and managing director of The Boston Consulting Group in Japan, what the relatively long period of growth under Abenomics did was allow a certain complacency to set in - despite the enormous reform agenda still ahead.
“It is a bit unfortunate we have lost this sense of panic,” she said in a recent discussion with bluenotes in Tokyo. “The economy was being driven to change by a certain anxiety. The average Japanese companies have margins, earnings, way, way lower than their global peers.”
Tsusaka said – and again this is a longstanding phenomenon – the export-focussed, globally exposed Japanese companies are vastly more efficient than the domestic ones, particularly in the small to medium-sized enterprise (SME) sector.
Her colleague, BCG partner and managing director Yasuhiro Yamai, said this focusses attention on the third arrow of Abenomics – restructuring of the economy. While the first two arrows, fiscal stimulus and monetary policy, had relative quick and measurable impacts, they are only short to mid-term palliatives. It is the third arrow which is essential for sustainable growth.
“And some say it is stuck, some say it is ongoing, it is not clear,” Yamai said. “But the government believes the future for Japan Inc. is in IT, digital – the problem is in this area we are not moving fast enough. China is moving ahead. The EU, Nordic countries, Singapore, are moving ahead.”
From the BCG perspective, Japan has the opportunity as well as the challenge. The firm singles out three areas in particular:
With record profits companies need to focus on investing in new technology and next-generation manufacturing. The question is whether enough is being done on this front and whether Japan Inc’s corporate mindset and strategic focus is right.
Neither is a strong point today in Japan. Diversity has never been, a particular challenge now given the growing evidence of how strongly it is linked to innovation.
BCG found companies which broaden their approach to diversity – including age, gender, industry background, nationality, career path—see bigger benefits. The diversity effect is also greater for digital innovation.
According to BCG, Japan enjoys relatively good health care outcomes at a reasonable per capita cost, thanks to universal access, a single payer system, and strict cost control.
But the population is ageing. Value-based health care, where the costs and outcomes of different interventions are measured, shared, and used to guide the selection of therapies across the health care system, is very challenging but the firm notes Japan has every incentive to be a pioneer.