Some hope for Japan’s economy has come from China amid the ongoing pandemic. China is slowly lifting its massive lockdown, allowing more economic activity. Many Japanese firms are anticipating new orders from China, especially for new infrastructure spending. This bit of good news mitigates Japan’s declaration of a national state of emergency from April 16 until May 6, and the postponement of the Tokyo Olympics to 2021. Japan has a special need to protect its high-risk aging population.

It’s still anyone’s guess what happens next. The global base case is for the worst to be over by July—though the world economy could still spiral into a deeper contraction from slumping profits, rising bankruptcies and growing unemployment. But assuming the base case for July and containment of the virus’s spread in Japan, a recovery in China should soften the pandemic’s blow for the country.

Japan’s economy has some hidden strengths. While it may seem Japan’s GDP growth has been anemic for decades (even prior to the pandemic), what’s been overlooked is that Japan’s per-capita GDP growth has actually been accelerating despite a shrinking population. That’s because, with the number of citizens dropping, even a slender 1% or 2% growth in real terms translates into a very tangible improvement in economic output per person.

By that measure, Japan’s economy is likely to get healthier. To grow, an economy needs investment—and investment in Japan has been gathering strength over the last decade. Investment (measured as real, gross fixed-capital formation) as a percentage of real GDP has been rising steadily since 2011, nearly doubling to 15.3% in 2019.

What has been driving this increase? Profit. Average business profits as a percentage of GDP rose from less than 5% in the first quarter of 2010 to over 15% in the first three months of 2019. A similar pattern is taking place in returns on equity.

Improving profit margins give companies not only the capacity, but also the incentive, to invest and expand. When they do, they create jobs and boost wages. Consequently, Japanese wages as a percentage of national income recovered from a low of 48% in the first quarter of 2015 to 52% in the third quarter of 2019. A tighter labor market is good news for both businesses and consumers.

To be sure, these figures are based on pre-virus data, and they may all take a hit this year from the pandemic. At the moment, though, Japan’s tight labor market bodes well for a key objective of Abenomics to further rejuvenate the economy: raising women’s participation in the labor force. Japan has made much progress in recent years to get more women into the workforce, a positive development that both improves household incomes and eases labor shortages due to Japan’s aging population.

Link : https://www.forbes.com/sites/yuwahedrickwong/2020/04/29/japan-econ/#ea4ba1529cee