Assessing Japan’s economy and GDP amidst the weakness of the yen

This topic has possibly been discussed recently, but I’m wondering if I could get some inputs and insights from people who are more knowledgeable and in the loop and/or with more life experience. I don’t feel as if I’ve been able to fully understand the state of the Japanese economy. As many of you may know (and as has been covered recently in the news), Japan’s GDP (in nominal terms) has now slipped to fourth in the world after Germany recently overtook it. To what extent is this because of the weakness of the yen as a currency vis a vis the dollar (and euro), and to what extent is this a sign of the underlying weakness of Japan’s economy? After all, GDP is measured in U.S. Dollars, so perhaps the yen being weak has perhaps impacted how much Japan’s GDP is worth in dollars. Germany’s economy isn’t that strong either (and has recently faced some challenges too), so it’s kind of interesting that it overtook Japan. By some measures, Japan has also had pretty decent quarterly economic performance too, right? And isn’t a weak yen good for exports and attractive for inbound tourism (which seems to be becoming more important for Japan’s economy)?

Japan on the whole feels pretty well-organized and prosperous on the surface. I know that wages are on the lower end for a developed country, but prices of many items are also relatively affordable compared to North America and much of Western Europe. Americans and some Europeans may have a higher income, but the standard of living here in Japan seems pretty decent and not too bad.

Curious also to know what people’ thoughts are and whether the current state and future prospects of Japan’s economy (and currency) are influencing your plans to stay in Japan or move elsewhere (or perhaps back to your home country). Thanks!

22 comments
  1. That Japan ‘slipped’ to fourth is rather meaningless. China is second, and nobody in their right mind would think that China is even remotely in the same class as Japan, Germany, UK, France etc in terms of ‘wealth’.

    It’s also silly to think about measures of GDP that fluctuate based on fx rates – while fx rates obviously have an impact on the economy and households, fx rates are *relative -* they depend on how Japan (for example) is doing vs other countries. Nothing at all could change in Japan, but if interest rates in the US moved, that would have an impact on the yen-dollar rate. It’s been this interest rate differential that has probably been the key mover behind the recent yen weakness – ie, Japan inflation has been relatively mild compared to the US / UK so far. Japan unemployment remains low and labor remains extremely tight in many industries – that’s hardly a sign of a weakening economy.

    When you say ‘wages are on the low end for a developed economy’ – remember, you’re arbitrarily converting those wages into another currency to compare, which again, isn’t remotely appropriate. For starters, if the yen weakend 30%, the US dollar equivalenet of the same Japan wage converted to dollars is now 30% less, but the Japan worker on that salary wouldn’t see or feel any change at all in his / her actual salary.

    I’ve lived extensively in the US, France, Japan, Hong Kong and the UK. Other than rent, Hong Kong felt relatively inexpensive. France and the UK felt expensive. Rents in Hong Kong were nuts, rents in London, New York, and San Francisco were obscene. Compared to those cities, Japan has a much lower perceived cost of living, mainly because the gov’t has strongly promoted *affordable housing.* They’ve avoided the NIMBY-ism that tries to prop up housing prices by artificially restricting new building.

    Yes, Japan has some longer-term issues – mainly demographics-related – but it’s hardly the only country dealing with that.

    ​

    Also worth pointing out – would you rather have a lower ‘ranking’ in GDP, or be like the US with higher GDP but also lower life expectancy, higher crime rates, higher poverty rates, worse healthcare and worse medical outcomes for the vast majority of procedures…etc.

    GDP growth is a pretty bad yardstick for measuring a country’s prosperity.

  2. Japan imports a lot, from fuel to materials for its manufacturing industry.

    Prices are going up in USD already, the weak yen is a double punch.

    Companies have to raise their prices to stay afloat. But there was a report recently that consumer goods companies who raised their prices have taken a major hit in the number of units sold. They are not making enough money to increase salaries, and Japanese workers in general don’t have the money to eat the higher prices companies are asking.

    Japanese real income is falling and will continue to fall due to inflation and tax/social security increases.

    Interest rates are already at virtually zero and the economy is still shit. Companies aren’t investing, even with free money. Raising interest rates, which is the only surefire way to strengthen the yen, is going to put a whole lot of borrowers in misery (more than 70% of mortgage holders have floating mortgages) and screw the economy further.

    Life is still not bad here, but I don’t see it getting better. A lot of infrastructure will start crumbling in the next couple of decades. It’s going to cost a lot to replace with the rising cost of building materials. And Japan doesn’t have the people to build it. Young people who could be in productive industries are going to get increasingly diverted into looking after the elderly, and more taxes will be needed to pay for them.

    The only ways out are to innovate and produce something valuable that people overseas will pay a premium for, cut taxes on the working generation to stimulate spending, and import foreign labor/taxpayers.

    Maybe someone else can paint a brighter picture!

  3. I’m not privy to opinions on the street, but I want to propose that the ‘slipping’ and ‘weakness’ of the yen you are seeing should not be interpreted as doomsday for Japan. If you’re viewing the economy as being relative to US and Japan, sure, but why not view it in the context of the entire globe? When you say Japan is fourth, how many other economies are on that list, and how many would you need to stack end to end to get the equivalent of Japan’s economy?

    In my opinion, while the economy is a handy way of evaluating the value of living in a certain place versus another, there is plenty that cannot be compared apple-to-apple, or at least I’m not currently aware of any standard that measures the rank of countries based on a combination of economy, health outcomes, educational possibilities as well as happiness.

    For example, I just went to a large hospital for a serious critical illness, and it cost me 300 USD to get a consultation with a professor, an MRI, and medicine which previously cost me nearly $9000 USD in Singapore. My health check this year is totally free. The food I can purchase for sub 3USD is healthy, varied, and of high quality.

    I’m also conscious that Japan is trying to position itself well for the Asian Century, (which I applaud them for) and I think there are many changes as part of that shift away from Western centrality towards Asia and the global South which will have a significant impact on the geopolitics and subsequently the economies of the major powers of the world over the mid and long term.

  4. The boomer generation subsidized their wife and kids ¥800/h jobs for the past 30 years while the government kicked the can down the road.

    Millennial parents aren’t going to be able to do that for their children, so unless real wages go up 1.5–2x I think there’ going to be a huge brain drain of young people in next 5–10 years.

  5. The west operates in the idea prices should increase 2% or more per year. So wages and the like have been doing that too for decades.

    The whole idea Japan is this basketcase economy is peddled by mostly americans to the one foreign country they actually travel to quite often and learn about a lot. But this is wrong a lot of economies will look like a basketcase country to a country that grows and pays as high a salary as the US. It’s on a different tier level. Look at some of the western European countries (not northern Europe they are USA tier salaries). There are a lot of things people would criticise there.

    Japan runs parallel to the rest of the world, I finally understand it since living here. Their culture is influencing me heavily and making me question a lot of western things we consider normal, like arguing, expressing excessive emotions caring about random strangers in public. It’s swaying me a lot.

    Japan just has deflation/prices staying same for decades. $1 used to buy so much more yen pre 1985. If you look at some prices of staples like UCC coffee and some ramen brands sold back then prices have barely changed. The dollar actually lost a lot of it’s purchasing power since then even though we are temporarily at ¥150 to a dollar in this moment.

  6. I talked to my dad, who’s an economist, about this recently. Basically I was confused as to the disconnect I felt between Japan having the 3rd largest GDP, yet stagnant wages and lots of people around me who seemed to be struggling financially.

    The tldr; of the conversation was basically that GDP is only one way of measuring a country’s economy and there’s been discourse among economists recently about if GDP should continue to be the main standard by which we measure things. There’s a lot of aspects of an economy and society that GDP doesn’t measure and some economists have suggested that we develop new metrics by which to measure economies

    [Here’s an article that goes more in depth into the idea](https://www.wired.co.uk/article/happiness-measurement-humanity)

  7. I presented about the Japanese economy some time ago so I’m taking some snippets of my work to answer your question, mainly the ones about the current state of the economy and my guess on its future.

    First, let’s talk about the current currency movement. Japan’s GDP ranking slipped to 4th largest in the world due to the relative weakness of the yen against other major currencies. This doesn’t necessarily mean Japan’s underlying economy is weakening. Most of the reporting on this mainly pointed out the central bank’s interest rate differentials between Japan and other major economies. This should narrow as inflation subsides and the FED’s rates move to the new long-run equilibrium. I think Ueda-san, the JP central bank governor, suggested that 日銀 rate would only be adjusted when signs for next year’s rate hike become visible, which should come once the 春闘 negotiation is finished and broadcasted, so around Q1/Q2-24. Until then, the movement of JPY-USD would be of anyone’s guess really.

    Second, on the topic of Japanese economy, I’m actually pretty optimistic about this. I wholeheartedly believe that the strength and resilience of your economy is totally dependent on the strengths of your domestic companies. Japan has successfully shown that it can reinvent itself in the face of intense competitions from Korea, China and Taiwan by moving up the value chain throughout the 80s-2020s. They have withdrawn or outsourced the B2C business while catering to the B2B business and moving up the value chain, in many instances dominating both materials and equipment parts manufacturing.

    For example, companies that successfully partially or completely exited B2C business and moved to B2B space:

    * Panasonic – Exiting most consumer electronics like TVs and focused on industrial solutions, automotive components, enterprise solutions, and batteries.
    * Canon – Initially a camera and printer company, Canon has built businesses in medical devices, semiconductor lithography systems, and industrial production equipment
    * Hitachi – Hitachi has sold some consumer brands and is now centered on industrial solutions across energy, rail, manufacturing, healthcare

    For example, companies that dominates the B2B high-end manufacturing:

    * Semiconductor manufacturing equipment for deposition and etching machines (Tokyo Electron – 30%, Screen Holdings – 20%).
    * Semiconductor materials like photoresists: Japanese companies command over 80% of the global market, with JSR alone holding 40-50%.
    * Specialty chemicals: METI estimates Japanese firms have over 50% combined global market share in 309 products, over 75% share in 112 products, and 100% share in 57 products.
    * Lithium-ion battery separators: Asahi Kasei (30%+ global market share)
    * Pressure sensors: Murata (1/4 of global market share)
    * Medical endoscopes: Olympus (70% global market share)
    * Industrial robotics: Fanuc (30%+ global market share)
    * … and many more

    In addition, Japan has remained the top economy in Harvard Growth Lab’s ranking for product complexity since the establishment of the ranking, and occupied near monopolies on semiconduction advanced materials and equipment, indicating its dominance in high-end manufacturing.

    Some forecast from me about the future:

    * The good: Japan’s strengths in digital technology and deep tech competencies in machinery, materials and semiconductors position it well to compete in the digital transformation of manufacturing through technologies like AI, robotics, IoT, cloud computing etc. Japanese corporates also have begun partnering with high-tech startups in areas like AI, material sciences to build new innovation capabilities. The transition from the old generation to the new generation, especially in upper management would herald a new era in Japan business landscape.
    * The bad: There’s no escaping the demography cliff. No advanced economies have managed to escape this fertility decline aside from Israel. Whether Japan’s demography would reach equilibrium where population can be maintained is not assured at all. Debt levels would still be hanging over the economy and social security and pension system would eventually be on the chopping block for fiscal security.
    * The consolation: The fall from grace from the bubble era in Japan was consider even bigger than the great depression in the US when looking at the extent of the price crash of both stocks and real estates. In the case of Japan, it’s almost remarkable how little external violence like riots had manifested itself, due to the inherent social upbringing of the Japanese and the government’s view on maintaining stability. The problems Japan faced & will be facing would be, or has already manifested in other advanced & emerging economies. I guess that their future economic crash would be much more chaotic due to the cultural nature of their economies. I’d say that the history of Japan, the resilience of its populace and the ability of its businesses and transform themselves in time of crisis give me hope that they can weather the future storm.

    Edit: Added the future’s prospect part

    Source:

    Ulrike Schaede: Japan’s Business Reinvention

    Harvard Growth Lab: Country & Product Complexity Rankings

    Center for Strategic and International Studies (CSIS): Mapping the Semiconductor Supply Chain: The Critical Role of the Indo-Pacific Region

    国立研究開発法人新エネルギー・産業技術総合開発機構: 日系企業のモノとITサービス・ソフトウェアの国際競争ポジションに関する情報収集」

  8. The problem with GDP as a measure, particularly as applied to developed economies, is that largely what they produce is intangible and their businesses are international.

    To illustrate let’s consider the entirely hypothetical case of a company that makes a phone. Let’s call it Kumquat. Kumquat’s phone is designed by the leading engineers in their home country (let’s say… ohhh… I dunno, the USA). This design is then emailed to factories in China, where it is actually made, then shipped to a third country to be finished, the finished product is shipped all over the world to be sold.

    Those manufacturers and the shipping fees are all paid by Kumquat-International, which is a separate company from Kumquat-USA that handles paying suppliers and manufactuers, shipping, logistics, etc.

    Now because each country has different rules and regulations those sales are managed by locally registered Kumquat companies, so you have Kumquat-UK, Kumquat-Mongolia, etc.

    These local companies are then charged various fees by Kumquat-International. There’s a cost per unit they “buy” from Kumquat-International, and additional fees like licensing for using the Kumquat logo, and basically other costs like any other franchise. At is happens these mean that the locally registered Kumquat companies have just enough to pay their staff and rent, and not a lot left over. Poor darlings! They’re barely keeping their heads above water!

    Now Kumquat-International rakes in all the cash, and is conveniently located in some tax haven country where it occupies the same 5 x 5 office as 300 other companies.

    Now so far Kumquat-USA hasn’t made a penny. In fact it’s in the red for all those engineers’ salaries and the R&D costs. Sure some Kumquat phones were sold in the USA, but after Kumquat-International takes its fees they’re actually in the red and need to apply for a tax rebate and government assistance! How unfortunate! They’re struggling to keeps their heads above water and (at least on paper) are eligible for a large wheel of government cheese!

    And this is how the international shell game is played with most major corporations.

    The bottom line here is that GDP is a fairly useless measure for any major international corporation, and doesn’t actually measure the economic output or value of major international corporations, even if those corporations nominally present themselves as being “American” or “Japanese” in terms of their original identity.

  9. Because people, economists in particular, are absolutely obsessed with growth. They’ve been declaring doom and gloom and the end of Japan for more than 40 years because once the bubble popped back in the ’80s or so the growth stopped and we’ve been stagnant ever since. Japan needs more immigrants because the population isn’t growing. Japan needs more women working because the economy isn’t growing. Morbo predicts DOOM!

    Meanwhile we’re living in one of the only global economies where it is still possible to have a healthy middle class lifestyle on a single income. Women are an economic powerhouse staying single enjoying free time luxury goods and vacations because they don’t want to work in the hellhole that is Japanese corporations. Somehow things have continued just fine without the myth of growth being sone weird pre-requisite for survival. And as Japan’s population shrinks until it hits a steady state it no longer needs the 2nd or even 3rd largest economy. Just big enough is plenty.

  10. Ask a young Japanese person and you’ll know the true state of economy. Lack of motivation and stuck in the grind with nepotistic politicians who don’t care

  11. The thing I worry most about it is Japan’s debt-to-gdp ratio. If I am not mistaken they are currently ranked number 2, only Venezuela’s DTG is higher

  12. In the end, GDP will rise in nominal terms if there is inflation. In this situation, you want to make sure you are looking at Real GDP.

    https://fred.stlouisfed.org/series/JPNRGDPEXP

    Japan’s Real GDP growth being negative for more than 2 quarters in a row is a recession.

    Another factor in GDP growth is population growth. More people can produce more things, so if your GDP per capita is increasing, and your population is increasing, so is your GDP. Herein lies the problem with Japan. The fact that it has a growing Real GDP still is nothing short of a miracle with it’s population decline. It is being propped up by exports, which is encouraged by a weak yen.

    That’s the jist of it. It’s not super complex, but there are a lot of complexities into the individual pieces of Real GDP. It’s just that population growth is insanely important to economic growth. Not just population, but working population. This is why Japan pushes employment despite being relatively male dominated. By increasing the women in the workforce, they increase the amount of work being done, and increase GDP. That’s Abenomics in a nutshell.

  13. About my own thoughts of living in Japan or leaving:

    I do have plans to leave eventually with my wife, but it does feel pretty crappy to see the ¥ getting weaker and weaker compared to $ and €. I’ve been watching the rate every few days, hoping to see some kind of drop so that I can exchange my savings into €, but it’s only ever getting weaker. If a day came where it went from €1 = ¥160 to ¥130 (like it was when I first came to Japan), I would absolutely convert all my saved money instantly.

    It’s easy as hell to get into Japan, but much harder to get out with the current rate and income.

  14. So, the news about Germany’s GDP overtaking Japan’s.

    In economic term Europe IS Germany. If Germany were to issue German marc, it’s value would be way up there, which is not good for export-oriented Germany.

    With the Euro, Germany were able to supress its value by including dozen other weaker-economy countries.

    Japan on the other hand – with inflation rampant around the world, and central banks raising rate – single handedly defies common economic sense, not raising interest rate, lower inflation, and what not.

    For 20 years, the BOJ has been trying to create this “condition”, and it has FINALLY arrived! Now it’s the chance. The avalanche of economic growth will be triggered again once the population get used to the feeling of “rising prices, rising wages” is normal.

    The Japanese word for “how do you feel about the economy” ia 景気. I love this word, because it clearly state that economy is all about how people “feel” it.

    When the feeling of rising prices and wages normalizes, ppl will consume and companies will not be so reluctant to raise wages.

    Atleast, that’s the theory and the hope.

  15. I don’t worry about it too much. It’s out of my control and anybody who claims to know the future is a liar. Things aren’t great at the moment and this will probably remain true for the short term, but that is true for most the developed world right now and there’s no need to let it dominate my life.

    Entire industries are dependent on Japan. If Japan goes under then it’s not going to go under alone; it’s going to be felt elsewhere.

    People here like to go on about how salaries are higher in America; I don’t know if you guys have noticed but things aren’t peachy in America right now. I would rather be here than there, and I would also rather be here than somewhere like Canada, the UK or Australia right now also. Things aren’t great here at the moment, but it’s far worse elsewhere. I consider us blessed because what we’re feeling is nothing compared to the struggles some folks are having elsewhere.

  16. Normally if you print currency like Japan does you get hyperinflation leading the central bank to increase rates. However, Japan does not have domestic hyperinflation, they have weakening of the currency instead. International inflation if you may. Prices in Japan are relatively stable while the things from abroad are inflating. Products made with foreign materials are in between. Standard of living in Japan has changed a little for the worse (Especially things bought from other countries). The economy, however, is benefiting on a global scale.
    Japan has basically reverted to the “emerging economy” status with some exceptions:
    – Wages are still high compared to other emerging economies (likely large wage growth is out of the question)
    – Domestic debt is high as compared to emerging economies, but foreign investment position is unusually strong (no chance of defaulting on IMF loans)
    – Population is not increasing, so no boom in domestic consumption (No chance of domestic boom)
    – Production standards are really high compared to other emerging economies (chance of international boom)
    – Japan managed to enter many trade agreements mitigating its declining domestic market (chance of international boom)

  17. > I know that wages are on the lower end for a developed country, but prices of many items are also relatively affordable compared to North America and much of Western Europe

    Not on the things that matter, healthy food are more expensive here, the only thing that dilutes the prices and make them seem OK is that they pad the portions with 50% rice, which is cheap.

    If you made the same dish shopping at literally any European supermarket the price would be lower, but we just don’t base our diet in rice over there. I said this after living in Ireland for 10 years, one of the most expensive EU countries, and I was in horror when I saw the prices of healthy food here. As in, fruits, vegetables, lean meat, and even just sticking to seasonal stuff.

    Another thing keeping the whole house of cards together is the cost of housing, which is a massive deal, while housing in Japan has slowly moved up it has exploded in the US and EU due to the complacency of governments, so overall cost of living ends up being better here, but if housing became comparable Japan would be unlivable.

  18. This is definitely one of the best post I’ve seen in a while. and the discussion were really informative. Additionally, one of the the most important question is , will the Yen’s strength comeback? at least on the level that provides comfort to the foreign workers sending money back home? If it will comeback when should we expect it to happen?

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