Japan’s economy has been stagnant for more than two decades.
In contrast with Japan, China is probably the country that has achieved the most economic development over the past 20 years. In the 1980s, “Made in Japan” was synonymous with top quality and Japanese products were exported all over the world. Japan also became the second-largest company in terms of GDP. Why, then, has the Japanese economy stagnated?
Originally, Japan’s economy developed by importing materials from overseas, manufacturing them at home, and exporting the products to other countries because of its limited resources.
The unfortunate fact is that the strong yen not only caused products made in Japan to be much less competitive within Japan as well as overseas, but it also reduced job opportunities for people in Japan, as Japanese companies moved their production overseas in search of cheaper labor. This reduction in employment has made the Japanese people economically poorer.
The decrease in employment also led to a slump in domestic consumption. The yen’s appreciation has caused products made in Japan to be less competitive, and Japan has begun importing and consuming more goods from overseas, especially from China. As a result, Japan’s domestic production system has been shrinking. On the other hand, China has increased its presence over the last 20 years.
Comparing GDP growth from 2019 to 2021 for China, France, Germany, Italy, the U.K., the U.S., and Japan, Japan had the lowest GDP growth rate, at 0.46%.
In 1995, Japan’s GDP share was 17.5%. However, in 2016, it was 6.5%. Over those 20 years, Japan’s economy dropped to one-third in the world’s share. Only Japan was not getting better, and the same applies today.
The Plaza Accord of 1985 agreed to stabilize the exchange rate. In reality, however, it was an agreement to take only the Japanese yen to a higher level and make Japan less competitive in the world market. After the agreement, the exchange rate appreciated from 240 yen to the dollar to 120 yen to the dollar in 1987, doubling its value in two years.
Japan has stagnated over the last two decades. Japan’s past style of importing raw materials from overseas, processing or producing superior products in Japan, and exporting them overseas has been fundamentally overturned by the prolonged appreciation of the yen, and products from China and other countries with low labor costs have become increasingly competitive in Japan and other countries, making Japanese products less internationally competitive.
This is the reason why the Japanese economy has stagnated or declined.
The yen’s appreciation since 1985 not only made the Japanese products in the international market less competitive but also changed the social structure of Japan. This had made it hard for Japan to recover even if the yen depreciates ,which Japan is facing right now.