The Japanese economy has been facing a number of challenges in recent years, including a declining population, falling GDP, high levels of public debt, and mixed domestic demand. The country's aging population, low fertility rate, and societal pressure on men to achieve financial stability before starting a family have all contributed to its declining population, which has declined by 1.8% over the past decade. Japan's GDP peaked in 2012 at $6.27 trillion and has since fallen to $4.93 trillion in 2021. The country has also been struggling with deflation and slow economic growth for many years, and its prolonged period of economic stagnation has resulted in one of the highest levels of public debt in the world, with a debt-to-GDP ratio of 262.5% in 2021.

Overview of Japan's Economic Challenges

Japan's external debt is also at its highest level, totalling around $4.5 trillion, and is largely the result of the country's large trade surplus and low interest rates, which have encouraged borrowing from foreign lenders through samurai bonds. Domestic demand in Japan appears to be mixed, with private consumption slowing in October and exports expected to fall in the first half of 2023 due to economic downturns in the US and eurozone. However, the Japanese government has approved an economic stimulus package worth approximately JPY 39 trillion ($264 billion) to alleviate the impact of rising prices driven by a falling yen and high commodity prices. The package includes measures to reduce monthly utility costs for households and financial aid for pregnant and recently-given-birth women, and will be funded primarily by issuing government bonds.

Japan's External Debt and Mixed Domestic Demand

Recently, the Bank of Japan (BOJ) changed its stance, leading to steep losses in the stock market and speculation that overheated inflation in Japan could force the government to reassess the BOJ's outlook on price pressures and eventually result in the central bank pivoting away from its negative interest policy. Although the stock market has been volatile, the Japanese economy is projected to remain resilient and enter a period of moderate growth in 2023 at 1.4%. The Japanese stock market index Nikkei 225 is currently experiencing a significant decline, with a high likelihood of a further 5% drop in its trend. 


One of the key policies that the Japanese government has implemented in the past to address these economic challenges was Abenomics, an economic policy framework that is based on a combination of monetary easing, fiscal stimulus, and structural reforms. Abenomics is intended to promote economic growth, increase inflation, and improve the country's competitiveness. While it has had some success in boosting growth and inflation, the policy has faced criticism for its lack of progress in addressing some of the underlying structural issues facing the Japanese economy, such as the declining population and productivity.

Japan's High Public Debt and Need for Fiscal Consolidation

Another key challenge for Japan is its high level of public debt, which has reached an all-time high of 262.5% of GDP. This high level of debt is a result of a number of factors, including Japan's prolonged period of economic stagnation and deflation as well as the need to spend large amounts of money on social welfare programs for its aging population. Japan's reliance on public works spending and low interest rates may also have contributed to the accumulation of debt over time. To address this issue, the Japanese government will need to implement measures to reduce its debt burden, such as cutting spending and increasing revenue through tax hikes or economic growth.

Comprehensive Approach to Address Japan's Economic Challenges

Overall, the Japanese dilemma is a complex and multifaceted issue that will require a comprehensive and strategic approach to address the country's economic challenges and ensure its long-term stability and prosperity. This may include a combination of policies such as abolishing Abenomics, fiscal consolidation, and structural reforms, as well as addressing the underlying demographic and societal issues that are contributing to the country's economic challenges.