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Japanese Economy Reels Due to Strong Yen and Aging Population

While external factors and national disasters hurt Japan's economy, the graying population is Japan's fault.
By Amiel Ungar
First Publish: 2/5/2012, 2:08 AM


It was a week of bad news for Japan on the economic front. Japan recorded a rare deficit in its balance of trade.

The major problem has been the rapid appreciation of the yen against the dollar and the euro, caused by several factors. The Federal Reserve has continued its easy money policy,  Europe is not yet out of the woods in terms of the debt crisis and, additionally, Switzerland has restricted purchases of the Swiss franc, leaving the Japanese yen as one of the few havens for investors. The overly strong Japanese currency is making Japanese goods less competitive in foreign markets.

The Bank of Japan is now considering active intervention to prevent the yen from climbing further. The difficulties encountered by Japanese export industries have led to massive layoffs. Some plants are being relocated abroad where operating costs are cheaper. When major companies such as NEC, Sharp Corporation or Mazda have to cut back, it affects their suppliers as well.

Japan's problems are not exclusively a product of external circumstances, such as natural disasters and the global financial crisis. Some of the wounds are self-inflicted-- for example, demography.

By 2060 Japan's population will have shrunk by 30%. Those aged 65 or older will represent 40% of the population while the work force age cohort of 15 to 65 will represent half of the total population. The Japanese fertility rate is now 1.35 when the rate for sustaining the population is over 2. This means that the Japanese Social Security system is doomed unless more income is poured in. The Japanese public and Japanese lawmakers are resistant to changes involving heavier taxation, but the necessary changes cannot be deferred much longer.

Demography can also influence innovation. For many years, the Sony Corporation, from the Walkman to the PlayStation, showcased Japan as a global leader in innovation. This year Sony is taking a $2.9 billion red ink bath. It is being outperformed and out innovated by its competitors and particularly by Korean giants such as Samsung.

There are people who, irrespective of their age, remain perennially young in their outlook. They constitute the exceptions. Youth tends to drive innovation and create the market for innovation when compared to the more mature population. The shrinking number of young people in Japan also hampers innovation.

Sometimes a disadvantage can be turned into an advantage. Japan revolutionized the automobile industry, because the lack of space for its factories literally forced Japanese automakers to adopt lean production techniques. Due to expected shortages in its workforce, Japan is more advanced in robotics, but this cannot compensate adequately for a rapidly graying population.