China Now Has Company In Showing Japan Who’s Boss

Japan has never quite gotten over 2010. That’s when an economy that had for decades been Asia’s biggest suddenly became No. 2.

Though the changing of the guard had long been predicted, the reality of trailing China hit Japan’s 126 million people hard. Now, another blow to national pride looms as South Korea and Taiwan gain on Japan, too.

The Japan Center for Economic Research, or JCER, thinks South Korea will top Japanese gross domestic product in per capita terms by 2027 and Taiwan by 2028. Atsushi Tomiyama, the think tank’s top researcher, cites Japan’s low birthrate, aging population, weak productivity and slow embrace of digitalization as the key headwinds holding the $5 trillion economy back.

Yet there could be a silver lining in all this: it could catalyze Japan into action to raise its economic game to preserve its lead.

Granted, many hoped being surpassed by China in 2010 would be the wake up called Tokyo needed. Sadly, it wasn’t.

No doubt, news that Asia’s most advanced economy was bested by its student—China—paved the way for Shinzo Abe’s 2012-2020 premiership. Adding insult to injury, China did it by cribbing from Tokyo’s development strategy.

Abe secured power by pledging a supply-side reform revolution to modernize labor markets, boost innovation and productivity and cut bureaucracy. Instead, he outsourced the job to the Bank of Japan, prodding the central bank to boost growth.

When Abe did put on his reformer’s hat it was to enrich wealthy owners of stocks and real estate. Average wages stagnated, setting the stage for Korea and Taiwan—also students of Japan’s development model—to show up the teacher.

Will predictions like JCER’s spook current Prime Minister Fumio Kishida to act? Only time will tell, but Kishida has already unveiled plans for a “new capitalism” that redirects the spoils of GDP to the middle and lower classes. Or as Kishida calls it, a “virtuous cycle of growth and distribution.”

Abe went the Ronald Reagan route, giving 1980s-style “trickle-down economics” another try. Kishida wants to incentivize companies through tax benefits and regulatory inducements to share profits with workers. He hopes to prod CEOs to take big risks again with new research-and-development expenditures to devise game-changing technologies.

These days, Korea’s Samsung Electronics Co. and Taiwan’s Hon Hai Precision Industry Co. are disrupting the global economy in ways Japan Inc. once did. Both Korea and Taiwan are embracing digitalization with greater urgency than Japan. Both economies seem positioned to churn out tech startups at a faster clip than their larger, more advanced neighbor.

A dearth of disruption helps explain why JCER thinks Japan’s GDP per capita will be $45,607 in 2027 compared to $46,519 in Korea. The institute sees Taiwan reaching $47,305 by 2028 relative to Japan’s $46,443.

This outcome would be partly about top-line economic growth. Japan is seen expanding an average 2% annually through 2035, roughly half the 4%-plus rate expected for Korea and Taiwan. It’s also about the policy mix at the government level.

At the end of 2020, just as Abe was leaving the prime minister’s office, Japan’s per capita GDP was about $40,000, roughly 25% higher than Korea’s and 42% above Taiwan’s.

What’s sure to limit Japan’s wage growth is weak productivity, a product of rigid, seniority-based and risk-averse labor practices. And while things are changing, Japan’s strict immigration system and poor English proficiency makes it hard to attract foreign talent—with or without Covid-19.

JCER’s latest numbers offer Japan something of a reprieve where China is concerned. In mid-2021, the think tank predicted China would surpass the U.S. economy by 2028. It’s since delayed that date to 2033 as President Xi Jinping’s regulatory crackdowns upend China’s longer-term trajectory.

As Beijing pulls the rug out from under Chinese tech and other key industries, he’s creating space for Japan to remind the globe it’s a mature and stable power. If Kishida is wise, he’ll use this moment to rally support for his “new capitalism”framework.

Time, after all, is not on Tokyo’s side as Omicron risks cloud the 2022 outlook. And as Korea and Taiwan join China in potentially outshining an economy that once towered over the region. In his opening address to lawmakers on Monday, Kishida said he will firm up his reform plans by the spring.

Kishida shouldn’t wait that long. He’s already waffled on early comments on policies toward capital gains taxes and share buybacks. Kishida must hit the 2022 ground running with a clear blueprint to rekindle the innovative spirit that once made Japan Asia’s role-model economy.

It’s not like China, Korea, Taiwan and other Asian upstarts are waiting for Tokyo to get its groove back.