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April was a testy month for Japan. The yen tumbled to a 34-year low before the government appeared to barge in with over $35bn worth of currency support. A prominent think-tank warned that well over a third of the country’s municipalities may vanish. A key industrial policy committee warned of chronic threats to national prosperity.
Japan — out of deflation, out of monetary policy sync with the rest of the developed world and, increasingly, out of people — has been plausibly described for more than a year now as being at a historic turning point. April, and the yen show in particular, have made its destination considerably less clear.
Among the various possible paths throughout 2024 and into its mid-term future, there is one that Japan affects to fear most: a notional descent into the disorder, disparities and dysfunction it associates with emerging economy status.
As the first Asian country to achieve the developed economy label, Japan has worn the badge for decades with as much pride as it has shown its terror at losing it. The idea of that happening, however absurd or remote, has elbowed itself a place in public discourse, often as a motivational tool.
The sustained battering of the yen since January, along with the excitement that has encouraged among speculators and the government intervention apparently triggered on Monday, have led some to declare the situation a currency crisis.
Some have invoked the idea that this exposes emerging economy-like vulnerabilities in Japan. And foreign tourists turning up in record numbers and declaring on social media how cheap the place feels may have added to a sense of accelerated diminishment.
But the hand-wringing, for now at least, feels misplaced. Japan’s economy could clearly be in better shape, and the weak yen risks suppressing a recovery in domestic consumption. But Japan’s foreign currency reserves stand at well over $1tn. The yen’s movement, however alarming on a chart, is beneficial to large parts of corporate Japan. The $1.4tn Government Pension Investment Fund holds roughly 50 per cent of its assets overseas and made record gains of $232bn in 2023.
Nevertheless, the emerging economy bogeyman has recently been deployed more persuasively. Last week, the Population Strategy Council, using the latest government projections for regional populations of women of childbearing age by 2050, defined 43 per cent of Japan’s 1,729 municipalities as “likely to eventually disappear”. The contours of future ghost towns, economic dead zones and chronic poverty, it implied, are already drawn.
On the same day, an influential industrial policy committee of the Ministry of Economy Trade and Industry published its latest report laying out the sort of radical changes the country now needed to remain ahead of emerging economies. Without serious changes in corporate management, it argued, real wage and GDP growth will remain flat. “As a result, even social stability could be lost,” the Meti report concluded.
There are, currently, some compelling counterpoints to the gloom. Among those, labour shortages are forcing long-overdue reform on companies, are allowing younger Japanese to take greater risks and show greater entrepreneurialism than they would in the past, and may ultimately provide the context in which the central bank is able to confidently raise rates as real wage growth becomes entrenched.
But what the recent ructions in the yen should most powerfully remind everyone is that Japan is in a moment of historic emergence. It is, all at once, exiting decades of deflation, stagnant wages, suppressed equity prices, change-resistant governance and labour excess and, given the unprecedented nature of what it has been through, doing so without guides. These are huge breaks with the recent past. The yen is finding its level in a setting where more or less every path is untrodden. The central bank has no peer that has been here. The corporate sector must react to a workforce, a shareholder base and a consumer mindset with which it is largely unfamiliar.
The risks of miscalculation — and, possibly, a severe diminution of living standards, are high, and will become higher over time in ways that Meti and others are right to lay out in dire terms. For policymakers and others, the emerging economy spectre may be a useful destination for Japan to constantly steer itself away from. The trick is sprinkling a long-developed economy with some of the optimism that comes with the act of emergence.
leo.lewis@ft.com
