On the Brink of 40 Lost Years: Momma Kazuo's Commentary on the Japanese Economy

December 29, 2024

This blog post summarises key points from the latest economic commentary by Momma Kazuo, executive economist with Mizuho Research & Technologies and former assistant governor at the Bank of Japan. Published on 25 December 2024, this piece is part of a series of articles exploring issues in the Japanese and global economies. It highlights the risk of Japan's lost decades continuing and questions whether the country can overcome its labour shortage.

A PDF of the original Japanese-language report is available here.

The end of deflation, but no growth

Looking back, 2024 marked the year Japan's economy exited deflation, as Shunto spring wage negotiations achieved increases exceeding 5% for the first time in 33 years, consumer price inflation surpassed 2% for three consecutive years, and the stock market reached record highs.
But real GDP growth remains alarmingly sluggish, suggesting that after the “Lost 30 Years,” Japan's economy is now heading towards a “Lost 40 Years.”
Since the COVID-19 pandemic, real GDP growth has averaged only 0.2% per year, far below the 0.5% trend growth rate.

Wages and inflation reflect economic problems

Deflation occurs when demand is too weak to utilise available labour and other supply capacities. In Japan, this happened after the bursting of the bubble which made households and businesses turn extremely cautious and unwilling to spend.
This demand weakness persists but is now exacerbated by supply-side constraints, such as rising import costs and a shrinking workforce due to population ageing.
Deflation has ended, with wages and prices rising, not because of stronger demand but because supply capacity can no longer meet even weak demand. Labelling this a “virtuous cycle of wages and prices” is an unrealistic and overly optimistic interpretation.
If a true virtuous cycle were occurring, public opinion surveys by the Bank of Japan would reflect greater optimism about living conditions, and the ruling coalitions' loss in recent general elections would be considered odd.

Stocks and the real economy diverge

Corporations and privileged individuals claim a virtuous cycle is underway because they are relatively well-off, can absorb the rising cost of living, and mistakenly believe higher prices reflect an improved economy due to increased profits and stock gains.
Nominal GDP growth appears strong, even as real GDP stagnates, but there are two critical considerations.
First, inflation erodes the value of financial assets.
Second, stock market gains since the early 2010s are attributable to corporate reforms, as wages, prices, and nominal output showed limited growth during this period.
Stock prices have risen due to shareholder-focused and profitability-enhancing reforms, such as the elimination of cross-shareholdings, increased influence of foreign investors, and government-led reforms, countering the perception that Abenomics' structural reform agenda was neglected.
If investors assume Japan's domestic market will continue shrinking, companies are evaluated primarily on (1) overseas expansion and (2) domestic business efficiency.
The issue is that (1) overseas expansion is unlikely to translate into domestic investment or wage increases, and (2) efficiency improvements may even have a negative impact.
This dynamic explains the disconnect between rising stock prices and the stagnation of the domestic economy, particularly among small and medium-sized enterprises and households.

On a genuine virtuous cycle

Ensuring households directly benefit from rising stock prices is one approach, but focusing solely on asset-based measures risks increasing inequality.
Outright redistribution policies, such as increased taxes on financial income, are impractical as they would disrupt the stock market's momentum and corporate reform progress.
There is hope in Japanese companies' inherent resilience and the potential for labour shortages to drive productivity gains, but achieving this requires businesses and shareholders to view domestic market expansion as profitable.
Initiatives like the TSMC boom in Kyushu demonstrate how government intervention can stimulate virtuous cycles by creating business opportunities, even amid demographic challenges. Economic security was a key driver in this case.
To avoid another four decades of stagnation, Japan must address critical issues like decarbonisation, developing new energy sources, strengthening science and technology, renewing infrastructure, and reforming education. This requires vision and insight from both the public and private sectors.

Stefan Angrick