[Awakening Japan]④ "Japan's Economy Facing Major Transition... Korea Must Focus on Preparing for Low Growth"

Bank of Japan Expected to Lift Negative Interest Rate Next Year
US-China Economic Conditions and Oil Prices Are Variables
Korea's Efforts to Lay Foundation for Becoming an Advanced Country Are Important
Policies Needed to Maintain Community and Support Working-Class

"Although Japan's consumption recorded a decline in the second quarter, face-to-face consumption remains solid due to the easing of COVID-19, and with companies' strong investment appetite, the long-standing deflationary (economic stagnation with falling prices) pressure is expected to ease."

Lee Ji-pyeong, a Japan expert and special professor at the Department of Convergence Japanese Area Studies at Hankuk University of Foreign Studies, said in an interview with Asia Economy on the 22nd, "The attitude of Japanese companies is shifting from restructuring to strategic investment, and with signs of consumption recovery, Japan's growth rate this year is highly likely to surpass that of Korea."

Professor Lee predicted that the supply glut and deflationary pressure in the Japanese economy have been easing, and that within this year, the economy will shift to a demand-excess situation. He expressed the view that as the gap between total demand and total supply in the Japanese economy changes to demand excess, inflationary pressure will continue. In particular, despite a decrease in real wages, consumption expansion continues amid an inflationary trend, and in the second half of the year, the inflation rate is expected to slow somewhat, allowing real wages to recover into positive territory.

Professor Lee said, "The Japanese economy will record a continuous real economic growth rate in the 1% range this year and next year, following last year, as it overcomes the aftereffects of COVID-19," adding, "Considering that Japan's potential growth rate is about 0.5 to 1%, this is a relatively good performance."

Below is a Q&A with Professor Lee.

- The Bank of Japan (BOJ) maintained its existing monetary policy at the Monetary Policy Meeting on the 22nd. When do you expect a policy shift to occur?

▲ The Bank of Japan decided to keep the short-term interest rate at minus 0.1% and continue its monetary easing policy aimed at guiding the 10-year government bond yield, a long-term interest rate indicator, to around 0%. Since it made changes to the Yield Curve Control (YCC) policy at the July meeting, it seems they want to observe the situation and maintain the existing policy to ensure a persistent and definite escape from deflation. However, recently, expectations for the timing of lifting the negative interest rate have accelerated. Since negative interest rates are abnormal, it is expected that next year the negative interest rate will be lifted first, followed by the abolition of the YCC policy. Whether this happens in the first or second half of the year will depend on variables such as the situation in the U.S., international oil prices, and China's economic recovery.

- The profitability of Japanese companies is improving.

▲ According to a Nikkei survey, the net profit of Japanese listed companies from April to June increased by 20% compared to the previous year. Amid price increases, the easing of COVID-19 led to increased human mobility and supply chain recovery, resulting in a structure where sales remain strong despite high prices. Unlike in the past, Japanese companies are increasingly adopting a stance of responding through wage and sales price increases. Above all, Japanese companies are strengthening efforts to seek new growth potential beyond the previous restructuring-focused strategy. The Japanese automobile industry, including Toyota Motor, has started investing huge funds in the delayed shift to electric vehicles (EVs), and the Japanese industrial sector is focusing on building various facilities and transportation networks to utilize ammonia and hydrogen for decarbonizing the traditional heavy chemical industry.

- Japan's semiconductor industry reinforcement is notable. Will Rapidus succeed?

▲ Rapidus was established last November by eight major Japanese companies including Toyota, Kioxia, Sony, NTT, SoftBank, NEC, Denso, and Mitsubishi UFJ Bank to domestically produce advanced semiconductors. Rapidus plans to mass-produce 2-nanometer (nm; one billionth of a meter) process semiconductors starting in 2027, but Japan currently only has factories capable of producing 40nm-grade chips, and acquiring the technology to mass-produce semiconductors several generations ahead will be very challenging. In 1988, Japan's semiconductor industry held a global market share peak of 50.3%, and the Japanese government aims to leverage this potential. However, at that time, Japanese companies' strength was in memory semiconductors, and Japan has never secured a global advantage in logic semiconductors. Especially, the core semiconductor equipment of Samsung Electronics and Taiwan's TSMC is from the Netherlands' ASML, and while Taiwan has thousands of technicians related to this, Japan lacks both equipment and technicians. However, from Korea's perspective, complacency is not an option. Amid U.S.-China tensions, the importance of semiconductors is increasing, and Japan is strong in semiconductor materials, parts, and equipment. Japanese materials and parts technology is incorporated even in ASML's advanced equipment. Although there is debate about Rapidus's success, it is necessary to pay attention to Japan's changes as it strengthens semiconductor competitiveness through cooperation with the U.S.

- Can Japan overcome low growth starting this year?

▲ Although Japan's economy is expected to escape deflation this year, the labor shortage caused by low birthrate and aging population is expected to continue. Due to labor constraints, the Japanese economy is expected to enter a low-growth phase again after 2025. Japan's labor force population will begin to decline in 2025, and the growth rate will slow to 0.4% in 2026-2030, entering zero-percent growth territory. The Japanese government and companies have maintained an expanding number of employed persons by promoting economic activities of women and the elderly, but as this approach shows limits, they are actively expanding the proportion of foreign labor. They are preparing to increase the foreign labor ratio to over 10%.

- Will our country follow Japan's footsteps?

▲ It is necessary to gradually prepare for the low-growth era. Achieving 3-4% annual growth is difficult for high-income countries. Rather than a long-term recession, it is important that growth slows in a low-growth society as part of maturation. Macroeconomically, negative growth should be avoided, but Korea now needs to focus more on policies to maintain the community and enrich the middle and lower classes. Japan's experience shows that as the middle-income class shrinks, the general population becomes poorer, but the Kishida administration is promoting policies to strengthen the solid middle class. Korea now needs to focus on laying the foundation for becoming an advanced country rather than pursuing reckless economic growth. Life is tough, so people do not marry or have children. Continuous investment in human resources is necessary to create an environment where lifelong education is important. Also, to maintain industrial competitiveness, it is important to invest in new growth industries such as EVs and solidify export positions, while actively exploring new markets beyond China. Advanced industries like green innovation and bio should also be strengthened further.