Arab News Japan

TOKYO: Economist Paul Sheard states that there are mitigating circumstances that offer some hope for Japan’s struggling economy, which currently experiences a government debt-to-GDP ratio of approximately 240 percent, widely considered unsustainable.

During a seminar organized by Japan’s Ministry of Finance, Sheard highlighted that Japan’s nominal GDP has grown by only 23 percent over the past 31 years, in contrast to the 314 percent increase achieved by the United States during the same timeframe.

Sheard also noted that Japan has not adequately adjusted its economic, political, and social paradigms in response to the world’s transformation over the past three decades, particularly due to the digital and information revolution. He mentioned practices such as the lifetime employment system and traditional corporate structures as obstacles to innovation and growth.

Sheard compares the top five US companies by market capitalization—Microsoft, Nvidia, Apple, Alphabet, and Amazon—with Japan’s top five—Toyota, Sony, Mitsubishi UFJ Financial Group, Hitachi, and Sumitomo Mitsui Financial Group. He concludes that this comparison reveals Japan’s lack of innovation and difficulty in progressing.

Japan’s aging population and declining fertility rate pose a poor outlook for its economic future, he says.

Sheard’s assessment had some positive elements. He welcomed the end of Japan’s era of deflation and noted the increase in nominal GDP. This improvement allowed the Bank of Japan to conclude its quantitative easing program and raise interest rates. These developments in Japan’s economy provide a glimmer of hope for its future.

A key factor in sustaining Japan’s economic performance is the maintenance of a strong workforce. Sheard notes that the number of foreign workers increased by 12.4 percent last year, a trend likely to continue into the foreseeable future. This influx of foreign labor could serve as a significant counterbalance to Japan’s challenging demographic situation, highlighting the potential of the workforce to influence the country’s economic future.

Sheard also presents a counterargument by noting that the 240 percent debt-to-GDP ratio can be misleading. He claims that Japan’s net debt-to-GDP ratio is closer to 160 percent, which he believes is a more accurate economic measure. He explains that “the government doesn’t have to repay its debt, as it is a financial instrument for transferring purchasing power into the future.” Additionally, he points out that Japan maintains a substantial current account surplus, ranging from three to four percent of its GDP.