16 September 2014
Japan's economy is still genki!

Japan's economy is still genki!

With the rise of China's economy these past years, some people now underestimate Japan. But Japan's economy is still genki!

These past few years, China's economy has surpassed Japan's to become the world's second largest. And the value of China's international trade is now the biggest in the world.

But don't underestimate Japan's economy. It is still very genki, or full of energy!

Japan's genki economy

Japan still has the world's third biggest economy with a GDP of $4.9 trillion, behind the US ($16.8tn) and China ($9.2tn), and ahead of Germany ($3.6tn). It is the world's fourth biggest trading nation after China, US and Germany.

But Japan's GDP per capita is the third highest in Asia at $38,500, after Macao and Singapore. Thus, Japan's production of goods and services per person is more than 5 times higher than China's $6,800.

Japan's economy is very advanced in that most workers have moved out of the agricultural sector, which now employs just 4% of Japan's work force. Japan's manufacturing sector employs 25% and its service sector employs 70%. Japan cultural industries -- "cool Japan" -- are now a new driving force of the Japanese economy. By contrast, 37 % of China's work force is still in the agricultural sector, while 29% is in the manufacturing and 35% in the service sectors.

Both Japan and China have some very big companies which figure among the world's leading companies, according to Forbes magazine. Indeed, the world's three biggest companies are Chinese banks -- ICBC, China Construction Bank and Agricultural Bank of China. They come in ahead of American companies like JP Morgan Chase, Berkshire Hathaway, Exxon Mobil, General Electric and Wells Fargo. Two other Chinese companies, Bank of China and PetroChina complete the world's top ten companies.

Japan has a number of companies among the world's biggest companies like Toyota at 12th, Mitsubishi UFJ Financial 37th, Sumitomi Mitsui Financial 56th, Nippon Telegraph & Tel 61st, Honda Motor 70th, and Softbank 73rd.

However, when it comes to Forbes' list of the world's best brands, no Chinese brands have yet made it into the top 100, despite the impressive progress of leading Chinese brands like Lenovo and Haier.

American companies dominate with eight of the world's top ten brands, which are Apple, Microsoft, Coca-Cola, IBM, Google, McDonald's, General Electric, Intel, Samsung and Louis Vuitton. Japan is also well represented among the world's leading brands with Toyota at 14th, Honda 20th, Nintendo 63rd, Nissan 78th, and Sony 80th.

Japan also has many new entrepreneurs. Masayoshi Son’s Softbank has the second highest market capitalisation, after that of Toyota, on the Tokyo stock exchange. In the fashion world, Tadashi Yanai’s Uniqlo is taking on casual clothing markets with great success in Europe, North America and emerging Asia, while Japanese chefs are guiding the world’s palates towards tantalising new adventures, such as Nobu and Okuda, and Hiroshi Mikitani’s Rakuten has become a world leader in electronic commerce.

Japan has long been a major international investor. It $136 billion in outward flows of foreign direct investment in 2013 were second only to the US's $360 billion and almost double China's $73 billion. Japan's accumulated stock of outward foreign direct investment is now over $1 trillion, about twice that of China.

As Japan has become an economic power in the manufacturing and service sectors, Japan has urbanized, as more and more people live in the city, some 92% today. China is also urbanizing rapidly, but its urban population is still 52% of total, though substantially up from 19% in 1980.

The quality of Japan's urbanization is also impressive. The Tokyo region ("Kanto") is home to some 35 million people. And yet according to a recent survey by lifestyle9.com, Japan is the world's safest country thanks to "its rare crime activities", "the disciplined Japanese people", and the strict prohibition of "possession of firearms".

Deep origins of Japan's strength

Japan's rise to modern economic power status began after World War 2, when its economy was substantially destroyed. But Japan's economic modernization really began much earlier. With the Meiji Restoration in 1850, Japan began an opening to the rest of the world. It deliberately sought to borrow the best ideas and knowledge from Europe and America.

Japan also benefited greatly from the inventiveness of its close neighbor, China, whose inventions have changed the world. There are of course the "four great inventions" -- the compass, gunpowder, paper-making, and printing. Other observers talk of the top 10 ancient Chinese inventions, which also include pasta, the wheelbarrow, seismograph, alcohol, kites, hang gliders and silk. Where would Japan and the rest of us be without these great inventions.

China's cultural influence on Japan was enormous through writing systems, Buddhism, architecture and arts and crafts, metal-work, shipbuilding, and music and literature. Many of these influences traveled to Japan through its diplomatic embassies to China over the centuries.

In short, Japan benefited greatly from being a "borrowing culture".

The main reason why China's economy is less advanced than Japan's today is that it began its modernization and opening to the rest of the world much later, in 1978. But one of the fundamental reasons for this lateness is that China very often thought that it had little to learn from the outside world -- even though it was very clearly way behind the West. Thankfully this attitude has now changed.

Japan's post-war recovery

How did Japan achieve such a strong economy over the past half century?

Japan's strong economy is the result of many sensible government policies -- in the same way that the Chinese government is doing many sensible things today.

Good infrastructure, especially for transportation, water supply, and sanitation have been critical underpinnings for Japan's economic development. Japan's high-speed train system, the Shinkansen, began in 1964. The World Economic Forum ranks Japan's infrastructure the 9th best in the world today. China's infrastructure is also improving dramatically as it is now ranked 48th out of the 148 economies surveyed.

Japan's excellent infrastructure and organisational capacities enabled it to host the Tokyo Olympic Games in 1964 and the Osaka World Exhibition in 1970. China followed in Japan's footsteps when it hosted the Olympics in 2008 and the Shanghai World Exhibition in 2010.

A well educated work force has also been a key element in the success of both Japan and China. The OECD's PISA (Programme for International Assessment) exercise ranks both China and Japan very highly in terms of 15 year old students' literacy, numeracy and scientific abilities.

Shanghai, the only part of China to participate in the 2012 edition of PISA, was ranked number one, while Japan was seventh. Other leading countries were way down the list -- Germany 16th, Australia 19th and the US 36th.

Participation in international trade has also been important for both Japan and China. When countries compete in international markets, they are forced to become efficient to succeed. And exporting helps finance imports which foster development and provide access to technology. Before the reform period beginning in 1978, China tried to build up industrial strength by replacing imports. But this led to inefficient industries.

China is very visible in international trade because it is the final assembler of products like the i-Phone. But its value added in the i-Phone is very low, perhaps around 5%. In contrast, Japan's contribution to global manufacturing supply chains can been invisible, because it very often specializes in high-tech components.

For example, it has been estimated that more than half of the parts and components, like capacitors, transistors and the liquid crystal screen, used in the iPhone 5 are made by Japanese manufacturers. And more than 65 Japanese companies supply the aircraft manufacturer Boeing with parts and components across its commercial and defense product lines.

Japan has always had competitive domestic markets run by the private sector. Wherever you go in Japan, you will see factories, offices, shops and restaurants run by private business. The role of the private sector is much more recent in China. And even today, most large Chinese enterprises and banks are state-owned.

Despite this excellent performance, Japan's economy has been stagnating since a financial crisis struck over two decades ago. Japan now faces many deep challenges like a massive public debt, poor demography with its aging and falling population, and a weak innovation record.

Japan's case provides many lessons to China, which is beginning to face many of these same challenges (some of which we examine in a future note). The problem for China is that it is now facing such challenges while it is still only a middle income country. In contrast, Japan had already achieved high income status before it was afflicted with these problems.

The Japanese and Chinese economies also have many complementarities, which could help both countries grow strongly and together in the years ahead. But this partnership is currently threatened by political tensions. We will cover these issues in our third note.


John West
Executive Director
Asian Century Institute
Tags: japan, gdp, gdp per capita, investment, urbanization

Social share