By Anthony Harrington
It is axiomatic that any country with a disproportionately large aging population has some serious issues to resolve in the medium to long term. Since Japan has more than its share of the over 60s, the country would probably be in some difficulties even if it was not completely bogged down in the aftermath of the bursting of its stock and property market bubble more than two decades ago. As it is, there is a pretty clear consensus among most commentators that Japan's economy is not exactly flying.
However, and somewhat paradoxically, the fact that the country is limping along with less than 1% annualized growth does not seem to trouble many people unduly. For most commentators, even as they give a cursory nod in the direction of Japan's two lost decades, a stronger Japanese economy always seems to be just around the corner.
The Bank of Japan itself, in its November 2012 report, puts exactly this kind of positive spin on a state of affairs that may well have induced panic in most eurozone governments. The report begins by admitting that Japan's exports and industrial production have decreased over the last year - a fact that, of itself, is worrying enough. The blame for this decrease, the BoJ suggests is the falling off in demand, which has naturally accompanied the European Union's endemic sovereign debt crisis. The fact that, as the BoJ puts it, "overseas economies remain in a deceleration phase" (a nice euphemism for the onset of Europe's third technical recession since the 2008 crash) has, not surprisingly, caused Japanese businesses to cut back on fixed investment. This is unfortunate, since investment by business had been on a moderate increasing trend. Other signs of weakness include a sharp falling off in car sales, largely due, the BoJ says, to the phasing out of stimulus measures to encourage car sales.
However, all is not gloom and doom. Public investment is increasing as is investment in the housing market. In a recent report on the Japanese economy, Forbes commentator Bill Conerly confidently asserts that 2012 will be a "bounce back" year for the economy after the East Japan Earthquake, with the stimulus provided by rebuilding having a positive impact generally. Japan also benefits from the fact that contrary to the popular vision of Japan as a massively export led country, exports account for only around 13% of GDP. Moreover only 10% of this 13% is accounted for by trade with the European Union. This is good because the EU continues to be one of the biggest risks to the global economy, so Conerly argues that the lower one's exposure to Europe, the better. Trade with Asia accounts for about half Japan's exports with China playing an ever increasing role. Or at least, it was, until Japan shot itself in the foot by allowing a long standing dispute with China over a few rocks in the East China Sea to suddenly take center stage, generating tremendous anti Japanese sentiment across China and doing immense harm to its trade with China. At the time of writing both sides were trying to find a face-saving way out of the impasse over the Senkaku island fiasco that would allow the normalization of relations, but there is no doubt that if China stays annoyed at Japan, the latter's economy is going to take a fearful blow. (A recent report in the Wall Street Journal argued that there is more possibility of this particular dispute breaking out into armed conflict, albeit of a limited nature, than people realize, which would be disastrous for Japan's economy.)
The BoJ is not unduly concerned however. The current weakness in the economy is a passing thing, it argues, and "thereafter the economy will return to a moderate recovery path." The Bank pins its hopes and its analysis in large part on the resilience of local demand and on the likelihood of the EU getting its act together and getting a growth story back on track. Time will tell if it is right.