Changes in the Global Economic Landscape and Issues for Japan's Economy

The effects of globalization on Japan's economy over the past quarter century can be summarized in the following five features. First, compared with the United States and Europe, Japanese firms have tended to raise productivity by improving the efficiency of their production processes through use of low-cost inputs from abroad. Second, a decline in the competitiveness of Japan's trading sector is due to intensifying competition from abroad and it can be seen as a factor behind the deterioration in Japan's terms of trade and the depreciation of the yen's real effective exchange rate in the long run. Third, there has been a shift in employment from the manufacturing sector to the nonmanufacturing sector, while a wage gap between these two sectors has widened. Fourth, globalization has exerted continuous downward pressure on inflation in Japan for most of the past 25 years. Fifth, in the face of declining price markups, partly due to intensified competition from overseas, Japanese firms have been able to secure their profits by increasing wage markdowns. Given the growing debate about the risk of deglobalization and the impact of heightened geopolitical risks, it is worth deepening our understanding of the impact of these factors on Japan's economy by carefully examining how the five characteristics outlined above will change (or whether they will not).