Japan is a "canary in a coal mine" for other Asian economies and Europe as it grapples with long-term structural changes, particularly its ageing population and the severe deflationary pressures it faces, a Japan expert has said.
For example, "some of the problems Japan is facing today will be problems which Singapore will be facing in the future", said Dr Lam Peng Er, senior research fellow at the East Asian Institute.
A growing proportion of Japanese are set to hit retirement age and the population is expected to decline from 127 million now to 87 million by 2060. Dr Lam warned that similar problems will stalk Singapore, South Korea and Taiwan, where the total fertility rate is way below replacement level, and eventually China.
Japan's slide into deflation in the last two decades as a result of factors such as asset bubble collapses and over-cautious monetary policies is a cautionary tale for Europe, where the troubled euro zone is grappling with stagnation and the threat of deflation.
There were hopes of recovery in Japan when Premier Shinzo Abe, who swept back to power in December 2012, introduced "Abenomics", economic policies comprising bold monetary easing, flexible fiscal stimulus and a plan to energise the private sector.
For a brief period, Japan appeared to be on track for growth. But last Monday, analysts were stunned when official data showed that it has dived into a recession after a second straight quarter of contraction.
"What you are looking at is an optimistic projection of 1.6 per cent GDP (gross domestic product) growth for the next 10 years," said Dr Lam, adding that he was unsure if this was attainable.
Options to boost the economy by getting women and foreigners into the workforce are limited because of the closed nature of Japan's society, he noted.
Even on foreign policy, Mr Abe's hands are tied in trying to improve ties with China because of a widespread anxiety among Japanese about the rise of China.
Still, the picture is not all grim, said Dr Lam, as Japanese society is resilient. Father of modern China "Sun Yat-sen said the Chinese are loose grains of sand. But the Japanese are sticky rice, they stick together and that is their strength", said Dr Lam.
This article was first published on Nov 24, 2014.
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