I used to be an economist, yet for a long time, I struggled to understand why the Japanese economy remained stagnant for so many years. I have never heard of any other economy where wages have barely risen for over 30 years. Even in 2023, a year when people claimed wages finally went up, they did not rise as much as prices did. In real terms, they actually fell—meaning real wages continued to decline.
Generally, the primary factor determining long-term economic growth is productivity. Suppose you are a barber. If you could previously cut only one person’s hair per hour but hone your skills to cut two, your productivity has doubled. Alternatively, if you refine your technique to provide a better finish and successfully raise your price from 3,000 yen to 6,000 yen per hour, your productivity has also doubled. This is why economists have a tendency to focus heavily on productivity. Professor Hiroshi Yoshikawa, Professor Emeritus at the University of Tokyo and one of the highest authorities in Japanese economics, has repeatedly stated that innovation is essential for economic growth. This is because innovation drives productivity. As a former staunch market fundamentalist myself, I used to take the arguments of mainstream economists like Professor Yoshikawa at face value. Whenever there was a debate in magazines or on TV between proponents of proactive fiscal policy and mainstream economists (structural reformers), I was always convinced by the latter.
In Japan, we have attempted various measures that seemed related to productivity, such as deregulation, R&D investment, and support for self-development. However, more than 30 years after the collapse of the 1990 bubble, no innovation has occurred on a scale that could normalize the economy. On the contrary, innovations from China, South Korea, and Taiwan—regions that were once considered technologically behind—are now highly prominent, while Japan’s presence seems to be fading. While I do not deny that Japan may have lacked effort in some areas of productivity improvement, the same could be said for other countries. This alone cannot explain why wages have failed to rise for over 30 years only in Japan. Although Professor Yoshikawa continues to emphasize innovation, my view is that the verdict is already in: while increasing productivity is certainly necessary, aiming for it as an end in itself will not pull us out of stagnation.
So, what was the unique factor specific only to Japan? Considering that inflation remained at low levels, it means that a shortage of demand (and a resulting oversupply) persisted for an abnormally long period. While the inflation rate has risen significantly since 2022, the bottom line is that it cannot be considered too high. There are many points of contention regarding this, so I will limit my comments for now, but I plan to explain this thoroughly in future posts. There are two ways to resolve a demand shortage: monetary policy and fiscal policy. Given that the former “worked too hard,” the main cause of the economic stagnation is likely that the latter “did not work hard enough.” In other words, I believe there is a high probability that our fiscal policy was simply wrong.
To demonstrate that there were problems with fiscal policy, an explanation from many different perspectives is required, and I intend to share my thoughts on this over time. As a former emerging market economist, I believe I can offer a somewhat different perspective compared to the general economists who primarily follow Japan, the U.S., and Europe.
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