The last time Japan hosted an International Monetary Fund summit nearly 50 years ago, the nation was a leader in innovation and economic growth that made it the envy of the world.
But now, as it gets set to host the IMF and World Bank’s annual meetings this week, Japan is struggling with huge economic and demographic challenges that have chipped away at its once-mighty status on the global stage.
There has been “a noticeable decline of [Japan’s] position in the global economy, falling wages, worsening employment conditions”, said Ivan Tselichtchev, an economics professor at Japan’s Niigata University of Management.
Despite the continuing success of its auto industry, some of Japan’s best-known corporate names such as Sony and Panasonic, which powered its export boom, have been battered by losses amid ferocious global competition.
The global financial crisis, an export-crippling strong yen and last year’s quake-tsunami disasters have been a drag on the nation’s economy recovery, while a shortage of workers looms as Japan’s population rapidly ages.
“The trend will accelerate after most baby boomers retire next year to 2015,” said Takashi Shiono, an economist at Credit Suisse in Tokyo.
It is a far cry from 1964 when Japan last hosted the IMF’s yearly summit, a year when it also held the Olympic Games and entered the club of developed economies – the Organisation for Economic Cooperation and Development (OECD).
Two decades after its 1945 defeat in the second world war, the once-shattered nation had invested heavily in technology that helped usher in a period of high growth.
Tens of millions dedicated their working lives to Japan’s success under an alliance known as the “iron triangle” formed between big business, bureaucrats and the conservative government.
“Since the start, in the 1950s... the government successfully launched an industrial policy promoting strategically important sectors, while at the same time creating a very competitive economic environment,” said Niigata University’s Tselichtchev.
Meanwhile, the Bank of Japan set about lending to strategic, high-growth industries including the steel, automobile and electronics sectors, rather than leaving growth solely to market forces.
An emerging middle class hungry for new products and a growing export sector saw the economy take up second spot globally behind the United States in 1968.
That lasted until the late 1980s when a financial and property market bubble burst, prompting Japanese firms to slash investment and fixed costs, including wages, in a move that fuelled widespread price declines, or deflation.
To battle the problem, Tokyo pumped massive amounts of money into public works projects, but the strategy had mixed results and left Japan with the dubious title of world’s most indebted developed economy.
The central bank made matters worse with policies that strangled growth, said Richard Werner, an international finance professor at Britain’s University of Southampton.
“Japan was held back solely by the BoJ’s restrictive credit-creation policy and no other reason,” he said.
Over the “lost decades” that followed the downturn, tens of thousands of firms went bust and in 2010 Japan lost its cherished spot as the world’s No 2 economy to a rising China.
That fall from grace however came amid some important reforms including revitalising the banking sector, privatising some key public firms and boosting efficiency, analysts said.
Tselichtchev warned that Japan remained hampered by weak political leadership and an inability to promote entrepreneurship and nourish strong business leaders.
“Japan needs real and effective solutions, it has to be fast and resolute in finding them, and finding them requires further change,” he said.