When in July 2017 the European Union (EU) and Japan announced they had reached an agreement in principle on what would be a milestone free trade deal – one of the most important bilateral trade agreements ever concluded by the EU – and a separate Strategic Partnership to tackle issues such as climate change and cyber-security, Japanese Prime Minister Shinzo Abe called it “the creation of the world’s largest free, advanced, industrialized economic zone”. For Japan, this was, both literally and metaphorically, a big deal. Following hot on the heels of the collapse of the long-awaited Trans-Pacific Partnership (TPP) trade agreement between Japan, the U.S. and other Pacific Rim countries, some commentators believed it could herald a much-needed return to growth for the Japanese economy. Now, with political agreement paving the way for the new and far-reaching trade agreement with the EU, experts predict that Japan could see a full turnaround in its economic fortune, even though GDP contracted in 2018 Q1, ending two-year run of growth.

Once a model of economic prosperity, the world’s third-largest economy had been hit hard after the Tokyo stock market crash of the early 1990s, experiencing deflation and stagnation. It has also been grappling with an aging population that has presented government and business with multiple challenges.

CONSUMER FOCUS: the Japanese economy could be seeing a turnaround in its fortunes.

As a result, the country has been losing business to the U.S., China and South Korea, especially in the technology sector where it was traditionally an agile and innovative leader. A report from the Mizuho Research Institute shows that this declining status is mainly down to lack of investment in sectors such as software and telecommunications, as well as a severe talent shortage. Added to this is the high rate of the yen versus the U.S. dollar, which still remains a challenge for exporters. And when you factor in the economic slowdown of China, one of Japan’s key trading partners, it’s not hard to see why the world’s fourth-largest export nation has been lagging behind, with exports decreasing at an annual rate of 3.4 percent, from $765 billion in 2010 to $670 billion in 2015. 

Enter Prime Minister Abe, who in 2012 launched “Abenomics,” a set of economic principles designed to revive the country’s flagging economy and based on “three arrows”: monetary easing, fiscal stimulus and structural reforms.

Initially, Abe’s reforms were slow to take off; but 2016 was the first year in a decade with no negative quarter-on-quarter GDP growth and in August 2017, the economy recorded its longest economic expansion in more than a decade, and its sixth straight quarter of growth – signaling that the country might be on the right track again.

GREAT SHAKES: Japan and the EU have reached a milestone bilateral trade agreement.

All the rage

Japan’s exports were solid, with ¥37.7 trillion ($3,390 billion) in the first half of 2017, up 9.5 percent year-on-year, according to Japan Customs – the Ministry of Finance’s customs and tariff bureau. The bureau also says that customers in the U.S. and EU are buying more Japanese bikes and foodstuffs, while Japanese manufacturers of industrial machinery and speed trains are experiencing a boom as countries across Southeast Asia upgrade their infrastructure. China, meanwhile, is showing sustained interest in Japanese products such as optical instruments for scientific use. The one fly in the ointment comes in the form of North Korea – recent tensions affected markets and saw the Nikkei average, which had risen by some 30 percent in the past year, dip and fluctuate.

Now, with political agreement paving the way for the new and far-reaching trade agreement with the EU, experts predict that Japan could see a full turnaround in its economic fortune. Tariffs for Japanese cars sold into the EU, for example, will be gradually lowered over a period of seven years from their current level of 10 percent. The Economist reports that an assessment of the deal’s impact (before the final details were agreed on) suggested that almost half of the benefit to Japan would be from lower tariffs and that, as a result, the EU’s exports to Japan could rise by 34 percent, while Japanese exports to the EU could rise by 29 percent.

THE FEMALE FACTOR: Japan’s government is encouraging companies to promote more women to management roles.

Traditionally, major global sporting events provide a boon for economies, and the 2019 Rugby World Cup and the 2020 Summer Olympics and Paralympics in Tokyo are no exception. Japan aims to improve domestic infrastructure to the tune of $55.4 billion, as outlined in an investment plan that includes a Maglev line connecting Tokyo to Osaka. Meanwhile, the Bank of Japan expects the country to generate between ¥25 trillion ($208 billion) to ¥30 trillion in sales and revenue for the economy in the runup to 2020.

Self-driving cars are on the agenda for Tokyo by 2020, and a joint venture between Mitsubishi Electric, mapmaker Zenrin plus nine car makers, is working on creating high-definition 3-D maps that digitally chart Japan’s key motorways. These will be given to automotive companies willing to invest in autonomous driving.

Crossborder e-commerce is another sector that shows great potential for pushing Japan forward, according to Hideki Matsumura, senior economist at the Japan Research Institute, a Tokyo-based thinktank. “Japan is doing a lot of online crossborder businesses with other Asian countries, especially China,” he said “This could lead to new growth for Japan’s economy.”

DRIVING DEMAND: The call for autonomous cars – like this Mitsubishi concept with self-drive capabilities – is expected to rise.

Indeed, in the first half of 2017, Japan sold ¥5.64 trillion and ¥6.93 trillion worth of products to ASEAN countries and China, respectively, up 10.7 percent and 17.7 percent year-on-year, according to Japan Customs.

“We are seeing incredible growth in the Japanese crossborder e-commerce market, with an estimated crossborder e-commerce value of $40.8 billion (€38.5 billion),” agrees Charles Brewer, CEO, DHL eCommerce. “In Japan, SMEs and sellers on marketplaces such as Rakuten, Amazon and eBay are the main crossborder e-commerce players, targeting markets in Europe, Asia, and the Americas. To enable them to grow their business and reach a wider customer base internationally, they need a greater variety of international shipping solutions with high-quality services while keeping their operational costs low. Specific e-commerce services are also needed, such as IT integration from shopping cart to delivery for a seamless logistics process.”

NEW INNOVATION: Japan is finding new uses for robotics, like this therapy robot for older people.

An aging society

There is, however, a serious issue which Japan urgently needs to tackle: the severe labor shortage, caused by the country’s aging workforce. Japan is believed to have the oldest population in the world, with a fifth of its people aged 65 and older (and that figure estimated to reach a third by 2050).

In an effort to get to grips with workforce shortages, companies pay premium hourly rates that increase every year, and married women are encouraged to go back to work. In April 2016 a new policy took effect, encouraging companies – at this stage voluntarily – to promote more women to management positions.

In addition, Japan encourages its senior citizens to stay employed. According to The Japan Times, more than half a million older Japanese people find work through the government-subsidized National Silver Human Resources Center Association. Companies are also bringing back older workers. The Japan Times reports, for example, that electronics giant Ricoh has called upon retired technicians to prepare its computers for installation at companies, schools and government departments.

“There is very strong market pressure for employers to keep older people,” Atsushi Seike, a Professor of Labor Economics and President of Keio University in Tokyo, told the paper.

“The drastic decline of the workforce will have a significant impact on the behavior of employers. Many are willing to boost the number of older workers, even at major companies, and I think this trend will continue – or even accelerate – in the future.”

OLDER AND WISER: Japan encourages its senior citizens to remain in employment.

But even with more older people and more women returning to the workforce, Japan still faces great challenges. In May the job-to-applicant ratio reached 1.49 – its highest level since 1974, according to Japan’s Ministry of Health, Labor and Welfare, and a problem that is especially critical for service sectors. According to Taketo Yamakawa, President, DHL Express Japan, one solution must be to create policies that are more open to migration. “Historically, Japan isn’t a country that opens to immigrants, but I think it must open now,” he said. “All companies would benefit from an increase in fresh skilled labor from overseas.”

The Japanese government has started to take action by setting up a privileged committee in 2016 to study how foreign workers could be attracted; and, according to the Ministry of Health, Labor and Welfare, there were 1.08 million foreign workers in Japan by the end of October 2016, the first time in its history that the number had risen to over a million. Among them, Chinese account for 31.8 percent, followed by Vietnamese, Filipinos and Brazilians, all employed primarily in service sectors. In April this year, members of a ruling Liberal Democratic Party (LDP) panel proposed an expansion to the types of jobs open to foreign workers and an increase of the foreign workforce to twice its current size.

Leadership in innovation

Yamakawa also believes it is high time for Japan to gain leadership in developing innovative technologies again. “Japan is good at applying and optimizing existing technologies such as robotics and artificial intelligence,” he said. “Innovation is the only way for Japan’s future growth.”

Japan is certainly forward-thinking in the use of robotics. The country already employs over a quarter of a million industrial robot workers, a number that is estimated to jump to over one million, with expected revenue from robotics to be close to $70 billion by 2025.

The government launched its “New Robot Strategy” in 2015, which aims to both develop robotics and expand its use. This would partly solve Japan’s demographic and labor challenges, with robots helping to fill the gap. The strategy’s goal is to gradually automate across all industries, from automotive to pharma.

HIGH-TECH: Japan already employs over a quarter of a million industrial robot workers.

Robotics is not the only field where Japan leads the way. Michael Sekora is a physicist and top former U.S. Defense Agency executive who, in the 1980s, headed Project Socrates, a Reagan administration program to determine why the U.S. was rapidly losing competitiveness in advanced industries. He believes that Japan has continued to perform superlatively in the field of technology, gaining dominance in dozens of advanced industries. In an article in Forbes Magazine he points out that “in electronics alone, Japan is the leading player in a host of crucial underlying technologies driving the information technology revolution. For example, only Japan can supply the highest grades of silicon needed for silicon chips. The country is also the dominant supplier of, for instance, the most sophisticated so-called steppers, which are the optical machines that imprint microscopically fine circuitry on semiconductors and liquid crystal displays.”

As Japan sets its course back towards leadership and growth, perhaps companies such as Fuji can help navigate the way. The former pioneer in color film is an example of how a business can use radical new methods to adapt, overcome challenges and succeed. In 2004 the company sunset its photo-film-centric business approach and declared the start of the “Second Foundation.” It used its technological assets – such as those of collagen and nanoparticle formulation fostered through the photographic business – and applied these to cosmetics and other new business fields. One of the results is Astalift, an entire range of anti-aging skincare. Fuji didn’t stand still in other areas, however, and a revival of its instant camera business, among other things, helped its group net profit rise 4 percent to ¥123.3 billion ($1.11 billion) in 2015/ 2016.  

Nanakorobi yaoki. Fall seven times and stand up eight. 七転び八起き —  Michelle Bach

Published: September 2017, Updated: July 2018

Images: Francois Walschaerts; Ferrantraite/Getty Images; tdub303; Chesnot/Getty Images; Kyodo News; Toru Yamanaka; FilipBjorkman/Getty Images; Tobias Hase/ dpa