The Sun Also Rises
For Japan, economic growth prior to the Pandemic proved scarce, not just for a few years but for the past generation. Japanese GDP in 2019 totaled $553.8 trillion or US $5.1 trillion. In 1995, Japanese GDP totaled US $5.4 trillion. Thus, for the past 25 years, Japanese GDP moved in a sideways pattern. Even when examined over a shorter time horizon, lackluster performance dominates. Despite the impact of Abenomics, which received much attention from the press, little changed for Japan over the past decade. GDP rose from a little over US$5 trillion in 2009 to just US $5.1 trillion in 2019. And with the Pandemic, Japan only hopes to re-attain 2019 GDP by 2022. Thus, for an almost 30 year period, an entire generation of the nation, the country delivered no economic growth.
However, under the surface, over the past 2 – 3 years, some fundamental changes in its economic structure may begin to become large enough to impact long term growth and underpin the concept that The Sun Also Rises. This centers on two factors. First, pressure to unlock the interlocking company structure of Japanese public corporations continues to rise as well as pressure to deploy the massive cash sitting on public company balance sheets. Of course, this pressure comes from outside foreign investors pushing Japanese company managements to act. This should begin to force underperforming companies to restructure to produce stronger results. It also should lead to either deployment of capital into assets that can produce a return, creating higher returns for the Japanese companies or a return of cash to investors, removing a large drag on Japanese company returns. All of this should impact economic growth in a positive manner, should the Japanese government encourage such change. Second, Japan began to open up its economy to foreign workers. While this may not sound like a large deal, given that America accepts a huge number of immigrants each year, for Japan, this represents a sea change powered by the country’s underlying population realities. The fundamental demographics of Japan dictated this change. Japan’s population peaked in 2010 and entered a long term decline phase starting in 2011. Due to demographics, scientists project Japan’s population to fall from 127 million today to 107 million by 2040 and 97 million by 2050. The only way for Japan to slow and reverse this decline will occur through immigration. With Japan apparently finally addressing these two structural drags on its economy, Japan’s economy finally possesses an opportunity to grow over the long term.
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