The complexity of the international scenario and the weakening of fiscal stimulus meant that growth was less than 1% in 2018. According to the report released by Crédito y Caución, projections for 2019 and 2020 maintain the evolution of this Asian economy below that level.
Export growth will slow due to falling Chinese demand and increased protectionist risks. However, this will be offset by domestic demand, in a context of reduced unemployment and rising wages. A consumption tax increase is expected in October, which will likely impact household spending. Business investment continues to rise, driven by increased spending on research and development and the 2020 Olympic Games in Tokyo. With inflation expected well below the 2% target, the Bank of Japan is not expected to introduce changes to monetary policy, with negative interest rates.
After a long period of fiscal flexibility, Japan faces public debt levels close to 225% of GDP. About 90% of this debt is held by domestic creditors, which constitute a financing base less susceptible to capital flight, but maintaining such a high level of debt is costly and its increase could become unsustainable.
In addition to high public debt, the country faces demographic challenges: the population is shrinking and the working-age population is also declining, which generates an increasingly smaller tax base, increased pension expenses, labor shortages in some sectors, and higher labor costs that are already affecting the country's international competitiveness.
To achieve a sustainable recovery and boost long-term economic performance, Japan urgently needs to make its labor market more flexible, end protections for farmers, doctors, and pharmaceutical companies, and introduce greater trade deregulation.
