CODE IN TOKYO

Japan Is Sliding Down the Global GDP Rankings as the Yen Weakens. Is the Exchange Rate Really the Problem?

I saw a news report saying that Japan was falling in the global ranking of countries by nominal GDP.

Japan was once the world’s second-largest economy. It has since been overtaken by China and Germany, and India and the United Kingdom are apparently next.

One direct cause is the weak yen. As long as nominal GDP is converted into dollars for comparison, a decline in the yen makes the Japanese economy appear smaller.

But would a stronger yen solve the problem?

Until roughly 30 years ago, Japan was suffering from precisely the opposite problem: an extremely strong exchange rate of ¥70 to ¥80 per dollar and prolonged deflation.

Imported goods and overseas travel were cheap at the time. Japan also ranked second in the world by GDP, behind only the United States.

Yet companies faced relentless price competition, wages did not rise, and the relocation of manufacturing overseas and employment insecurity became serious concerns.

Today, the weak yen and rising prices are painful. But if asked whether I want to return to the era of a strong yen and deflation, I would not want that either.

A weak yen causes problems. A strong yen causes problems too.

Apparently, the exchange rate alone is not the real issue.

The Real Problem Is That Fewer People Are Working While the Cost of Supporting Society Is Rising

Japan’s fundamental problems are population decline and an aging society.

The working-age population is shrinking while social security spending on healthcare, nursing care, and pensions for older people is expanding. Maintaining aging infrastructure such as roads, bridges, and water systems also costs money.

In other words, fewer people are supporting society while the cost of keeping it running continues to rise.

Of course, a shrinking workforce does not necessarily mean that the productive capacity of the entire economy must decline. Higher productivity can compensate for it.

In reality, however, the problem is not simple enough to be solved entirely through productivity gains.

The weak yen and rising prices are highly visible problems, but behind them lies a far more persistent and difficult structural problem.

Solutions Exist, but None Is Easy to Choose

So how can Japan address the problem of a shrinking workforce?

One option is large-scale immigration.

Bringing in workers from abroad could ease the labor shortage. But it would also create new challenges involving housing, education, social security, and coexistence with local communities.

It would not be easy for the Japanese public to accept a full-scale transition into an immigrant nation.

Another option is to enable women to play an even greater role at the heart of society.

Women’s labor-force participation has already risen, but there is still room for improvement in areas such as promotion to management and decision-making positions and the ability to combine work with childbirth and childcare.

That, however, would require major changes to corporate working practices and the division of responsibilities within households. Changing habits built up over decades is not as easy as creating a single new policy.

In a country where 80 percent of the members of parliament are middle-aged or older men, there seems little reason for optimism.

Another option is to restrain social security spending on older people.

This would help reduce the burden on the working population, but it would naturally affect the lives of older people. They also make up a large share of the electorate.

It is understandable that politicians are reluctant to tackle the issue aggressively.

It Is Not That There Are No Solutions. We Simply Do Not Want to Choose Them

We can also place hope in automation through AI and robotics, as well as in higher productivity.

But major social problems such as population decline and aging will not simply disappear through technological innovation alone.

To begin with, we do not know how much productivity will actually improve, while AI and robotics themselves are dominated by the United States and China.

Productivity may rise, but the bills from abroad may rise along with it.

In the end, Japanese society has several options.

Each option can be expected to have some effect. But every one of them also brings costs and pain.

And Japanese society is trying to avoid that pain as much as possible.

We do not want more immigration. We do not want to change traditional working practices. We do not want to cut social security. We do not want higher taxes or social insurance premiums either.

At the same time, we want low prices, high wages, and continued status as a major economic power.

I understand the feeling perfectly. I would like all of that too.

But if such a convenient solution existed, someone would surely have implemented it long ago.

Watching the Exchange Rate Will Not Solve the Problem

When the yen weakens, import prices rise and Japan falls in the dollar-denominated GDP rankings.

When the yen strengthens, imports become cheaper, but exporters become less profitable.

Both have advantages and disadvantages.

What matters is not whether the yen is weak or strong, but whether Japan has enough economic strength for its people to live prosperous lives under either condition.

To achieve that, the country has no choice but to adapt its social systems to population decline and aging.

But we do not want to accept the burdens that come with change.

It is not that there are no solutions. Solutions exist, but we do not want to choose any of them.

I do not know how far Japan will fall in the global GDP rankings.

One thing is certain: we can complain when the ranking falls, but the moment the conversation turns to the sacrifices required to raise it, everyone suddenly falls silent.