Japan boomed during the late 20th century. Some analysts from back then thought the Japanese economy would surpass the United States to become the world’s largest.

As we all know, that didn’t happen. Tepid growth followed the nation’s financial collapse in 1991. Japan’s economy remains weak today, over 25 years later.

Indicators show they’ll become even less significant – and it’s already happening. China surpassed them as the world’s second largest economy back in 2010. India will also overtake Japan before 2030.

Japan is historically a very protectionist and homogenous society. However, the government realizes its problems. They’re reluctantly opening up to more foreign investment while making it easier to do business in the country because of this.

The question is: will it be enough? We’ll look at some of Japan’s challenges and how the nation is tackling them.

 

Demographic Crisis

Most problems can be fixed, but demographics are especially hard to overcome. Japan’s are a nightmare.

Japan is one of the oldest countries in the world. The average age is 47 – second highest only to Monaco. That’s in addition to a high life expectancy of 84 years old. Both these things mean low productivity and an increasing need for welfare.

Fertility rates are at a dangerously low level as well. Two people must have at least two children for a population to replace itself. But the average Japanese woman has only 1.46 births. This is far below the replacement rate.

Japan will face rapid population decline throughout the coming decades because of this. A high proportion of retirees to workers, combined with a falling population, are already hampering growth. These issues should only get worse.

Before the end of this century, Japan’s population will fall from its current 127 million to barely over 40 million.

 

Still Unattractive for Investors

Japan has a reputation among foreign investors for being difficult. Everything from opening a bank account to getting a visa is (or at least was) a bureaucratic process. Lawmakers are taking steps toward making things easier though. Let’s see what they’ve done.

The number of foreign workers in Japan doubled over the past 8 years. Looser requirements for bringing low-skilled workers into the country have eased some concerns over staff shortages in the manufacturing industry.

High-skilled workers also now have a simplified, point-based application for getting long-term visas and permanent residency in Japan.

There’s an important difference between “immigrants” and “foreign workers” though. Immigrants create lives, have children, and stay for the long-term. Foreign workers are temporary and serve the purpose of filling labor shortages – not fixing broader demographic issues.

Policies are moving in the right direction. But Japan isn’t competing with its former self. They’re competing with other countries in the Asia-Pacific region.

These reforms don’t look so great when compared to places like Singapore, Malaysia, and South Korea, and others. These countries are more welcoming to both foreign workers and those staying on a more permanent basis.

 

Future of the Japanese Economy

Most problems in this article can be fixed. Robots and other technological advances can help solve labor inefficiency. Business-friendliness can attract investors and jumpstart growth. Looser immigration laws can prop up falling populations.

With that said, lawmakers must step up their game. Japan’s current policies are nowhere near sufficient or appropriate given the nation’s dire issues.

Time will tell whether Japan gets its act together. In the meantime, we recommend investing elsewhere. Many places in Asia have solid demographics, forward-thinking policies, and better futures.

About Reid Kirchenbauer

Reid Kirchenbauer is the Founder of InvestAsian. He's experienced with trading stocks and buying property in Thailand, Cambodia, and elsewhere. He's been featured in publications such as Forbes, Nomad Capitalist, Property Report, and Seeking Alpha. Download his free investment guide by clicking here.

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