Why Indians are key to reviving Japan's troubled economy (2024)

For years, the Bank of Japan maintained an ultra-loose monetary policy, hoping that minimal interest rates would help the country emerge from economic stagnation and deflation, but with limited success. Efforts such as purchasing government bonds and implementing "yield-curve control" to limit long-term interest rates have failed to sufficiently encourage lending or economic growth.

Economic growth has remained subdued, and inflation has consistently fallen below the 2% target. According to the International Monetary Fund, Japan's average annual GDP growth is projected to stay around 0.5% over the next four years, largely due to Japan's declining and aging population. The shrinking labour force poses a challenge to capital utilization.

Nearly a third of the Japanese population is over 65, and the country has struggled to reverse its declining birth rate. In 2020, only 840,000 babies were born in Japan, with the birth rate dropping to 1.34 children per woman of childbearing age. Consequently, the population of "new adults," or 20-year-olds, constitutes less than 1% of the total population.

Although Japan has a high savings rate due to its elderly population, companies have been unable to leverage these savings for investments, contributing to persistently low interest rates.

Bank of Japan’s “bazooka" of stimulus stoked inflation off and on, but never quite enough to keep it consistently at the central bank’s target.

Now the global inflation spike has done what monetary policy could not for years. Rising food and fuel prices have caused inflation to pick up a bit. The Bank of Japan believes it will be sticky, given expectations may have entered wage negotiations – worker unions have in annual negotiations this month secured pay hikes highest since 1991. Last year’s negotiated hikes, too, were the highest in three decades, but real incomes had actually fallen as inflation was higher. Besides inflation, wage hikes also reflect the pressures of a shrinking workforce.

Regardless of the monetary policy changes playing out, Japan’s economic recovery from decades of deflation and stagnation is still fragile. No one expects this to change. It’s beyond the powers of central banks to stimulate economies hobbled by structural problems, which in Japan’s case is its aging population and shrinking labour force.

Investments and consumption have remained low, as the Japanese often avoid drinking, marrying, buying cars, or making significant purchases, and generally refrain from taking risks. Three decades of economic stagnation and deflation have changed their attitudes towards consumption. Young Japanese are sometimes referred to as the “deflation generation", given their lifestyles contrast with those of their parents, who lived in what’s called Japan’s bubble phase.

Thousands of businesses that had powered Japan’s post-war economic growth, built it to be the world’s third largest economy are shutting down simply because the owners have no one to bequeath them to, often called a ‘national shortage of heirs’. It’s such a dire situation that dating-type apps are used for matching heirless business owners with potential sons and daughters to adopt.

Japan can overcome the demographic challenges that constrain its growth by allowing immigration from labour-surplus countries such as India. India is set to be the most populous nation in the world with a youth bulge giving it the world’s largest cohort of working-age individuals but not enough productive jobs to employ, as the constraint of savings and capital limits jobs creation.

Other rich countries will likely have to grapple with Japan-like demographics sooner than later. Unless the world finds a way to spread the gains of demographics from countries like India, advanced economies will remain pockets of stagnation. Changing attitudes to immigration is one way to go about it.