Japan’s economic growth has stagnated and its international competitiveness had declined over the past few decades. Another problem facing the country is its aging and shrinking population, which will also affect its economic vitality.

2 decades ago, Japan was the largest economy in Asia, but China has since taken that position. In terms of GDP, Japan is still the third largest economy behind the U.S. and China. But other countries are also coming from behind and could soon push Japan’s economy further down the pecking order if its economy fails to grow.

Japan Lags In Digital Transformation

There are some reasons why economists are worried about Japan’s stagnant growth. As the number of ‘aged poor’ increases, Income inequality, which is already high in Japan, could worsen.

Japanese firms are also behind when it comes to digital transformation. At the same time, there are fewer startups in Japan than in other developed economies. There are also fewer success stories for Japan-based startups compared to elsewhere in China, the U.S., and Europe.

As a result, policymakers in the country have tried to respond to the stagnant growth by formulating “growth strategies”. But Japan’s present economic situation shows that the strategies have not been successful.

The policymakers have also applied monetary and fiscal policies extensively. This led to the massive expansion of the Bank of England’s balance sheet, with a lesser impact on inflation. Despite these policies, the stagnant Japanese economy shows that the demand-based stimulus is unable to create sustainable economic growth. The policies the government has made over the years have not helped the country’s economic situation.

Monetary And Fiscal Measures Are Not For The Long-Term

The lessons drawn from these ineffective policies can be classified into two folds.

It shows that Fiscal and macro-monetary policies are stop-gap measures and should not be relied upon to solve economic issues in the long-term. They can be the best measure to stop or prevent a short-term decline. But they shouldn’t be counted upon for prolonged and sustained economic growth.

Japan also needs to address its supply-side issue, as the expansion of this area could lead to an ultimate source of sustained growth. Economic experts believe that policymakers need to focus on expanding their supply-side reforms rather than concentrating on temporary fiscal relief. Although the demand-side policies are also important, they should only play a supplementary role.