What Australia has in common with stagnant Japan

Japan might be the third largest economy in the world, but the past 20 years have seen its GDP growth rate fall behind that of its economic rivals, the US and UK.

The outlook appears bleak. Recently, Japan halved its second-quarter growth estimate, raising fears of a recession. Morever, Japan’s exporters could face more pressure after the US Federal Reserve announced a third round of quantitative easing, which could drive down the US dollar against the yen.

Pressure to deal with the country’s darkening economic outlook has fallen to the Japanese government (whose deficit financing bill probably won’t make it through the opposition-ruled upper house).

Meanwhile, Japan’s central bank has vowed to maintain its monetary easing policy.

Ippei Fujiwara from the Australian National University examines the long-term economic health of the nation and suggests societal ageing and a lack of technological growth could be to blame for the country’s falling GDP growth rate.

Japan is currently the third largest economy in the world, yet you call the last two decades in Japan’s economic history the “lost decades”. Why?

If we compare the path of Japan’s per capita GDP to that of the US or the UK or France, we can see Japan reached almost the equivalent level of the US and the aforementioned countries around 1990. Before that, GDP growth rate was around 9.4% until 1970 and 3.4% until 1980. Catch-up to these countries ended around 1990.

Japan’s lost two decades should not be recognised as the drop of GDP growth rate by 3% after 1990. Rather, the issue is why per capita GDP growth after the catching up has been relatively lower than other advanced economies. After 2000, Japan’s per capita GDP growth rate was under 0.9%, while other major countries on average were 1.4-1.5%. The problem to be investigated is a milder one: why the per capita GDP growth rate has been lower by about 0.5% than in other advanced economies.