The year 2010 was an important turning point in Japan's timeline. It was the year that saw the small island nation toppled over from its second-largest economy status by its giant neighbor, the People's Republic of China. Japan still continues to be the third-largest in purchasing power. It is also the world's fourth-largest exporter and fifth-largest importer. And yet, this country has in the last year faced hit after hit on the global scene.
Politically, Japan's state of instability has worsened, with three prime ministers in four years and, despite the change of guard from LDP to DPJ last year, the new party in power is itself working with its second PM, Naoto Kan, who has suffered an early setback in the Japanese house of Councillor's Election in 2010.
Political problems notwithstanding, Japan still struggles to jolt an economy out of three decades of stagnation and rejuvenate it. Japan's flagship company, Toyota, had to suffer embarrassment when it was forced to recall more than 10 million vehicles leading to snowballing share values of auto firms. Despite government stimulus, unemployment and underemployment are at an all-time high.
Public debt is mostly held by local investors, but is 200 percent of the annual GDP—one of the highest in the industrialized world. This is standing proof, not only to Japan's high savings rate, which is good, but also to its demographic dividend, which tilts heavily in favor of the non-working, old aged who depend on social security and place a burden on the economy. Japan also has the maximum number of suicides of people under 30. This coupled with a very low total fertility rate of 1.3 has led to a decline in the population of the country despite their average life expectancy.
Japan, as noted by analysts, is suffering from a Galapagosization syndrome, whereby its advanced technology, in the field of mobile communications and most notably robotics, has evolved much faster than the rest of the world. This has led to advancements being incompatible for use elsewhere, as is especially in the case of Japanese mobile phones.
"Japan's cellphones are like the endemic species that Darwin encountered on the Galápagos Islands—fantastically evolved and divergent from their mainland cousins," explains Takeshi Natsuno, who teaches at Tokyo's Keio University. This phenomenon might have benefited Japan in the Meiji Restoration era, but in a globalized world, it stands out as a stark contrast, not necessarily on the positive side.
In addition to the technological isolation, Japan also faces a similar isolation in terms of its population. Like other developed countries, the Japanese are having fewer children and having them later in life. By 2025, the government projects that Japan will have one retiree for every two working-age Japanese. This greying trend, coupled with the country's low birth rate, mandates large-scale immigration to keep the economy and the jobs running.
Japan seems to be caught up in a web of xenophobia that is aggravating the problem. While other aging countries have resorted to large-scale immigration to resolve their demographic crises, it remains almost impossible for a non-native worker to obtain citizenship, despite the fact that the cities abound with guest workers and foreign residents.
Japanese workers are also reluctant to catch up to the wave of innovation and change that is rocking the world. They refuse to go abroad, even if for a while, to feel the pulse of the market, which Japan so badly depends on. The Wall Street Journal reported, "The Galapagosization of Japan continues. … A shocking two-thirds of the country's white-collar workers said they didn't want to work abroad … ever."
This has presented a bleak prospect to the Generation Y of Japan, who feel caught between giants such as the United States and emerging China. And stiff competition is comgin from South Korea in what used to be Japan's core competence, high-end electronics, posing a big threat to their future prospects and careers. They feel that their choices have narrowed. Millions have given up the goal of lifetime employment at a major corporation and become "freeters," flitting among temporary jobs with few, if any, benefits. This, along with the aging population that will need state support to survive, does not in any way seem similar to the Japan of the 1980s, flush with cash and poised to dominate the world.
The conservative shell of the mind has been a tough nut to crack, but recent attempts indicate a slew of reforms waiting around the corner. Prime Minister Naoto Kan proposes opening up the economy by bringing down tariff barriers and making the country more attractive to investors. His cabinet cut the corporate tax rate to 35 percent and is weighing the option of joining a U.S.-led free-trade zone, namely the Trans-Pacific partnership, which would bring down tariffs on commodities ranging from food to electronics.
But a mere reduction of tariffs would be meaningless without innovation in the economy. Japan's competence in the field of hybrid vehicles and industrial robots is sure to come in handy if it manages to make its technology compatible with the rest of the world, especially the United States. China's reverse engineering capabilities won't take more than a decade to catch up to the technical advancement Japan has taken decades to achieve.
Japan also needs to shed its dependence on manufacturing and move in to "sunshine sectors" such as green energy, software engineering and healthcare for its elderly. But it remains to be seen if a weak tottering government will take steps bold enough to lift the country of its misery. Japan seems destined to follow had-been powers like Britain and France if it doesn't change tracks soon. On the other hand, if Japan does manage to muddle through and handle the decline well, it can reinvent itself as a soft power on the world stage. But that is a big "if," considering the competition that Japan today faces.
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