Why Japan’s Economy Is Struggling in 2024–2025

Macroeconomic Performance: GDP Growth, Inflation, and Unemployment

Japan’s recent macroeconomic indicators underscore a sluggish economic performance. Real GDP growth has been anemic: after a brief post-pandemic rebound, the economy grew only about 1.0% in 2022 and 1.5–1.9% in 2023, and growth is projected to slow below 1% in 2024 . By early 2025 the economy even dipped slightly – real GDP contracted at a 0.2% annualized rate in Q1 2025 (quarter-on-quarter), indicating a fragile recovery . This weak growth contrasts with more robust expansions in some peers (for example, the United States grew around 2% in 2023). It signals that Japan is lagging behind in the global recovery.

Meanwhile, inflation in Japan has flipped from historical lows to multi-decade highs. After decades of near-zero or negative inflation, consumer prices rose markedly in 2022–2023 amid global cost pressures. Headline CPI inflation hit about 3.3% in 2023, the highest in decades . As of mid-2025, inflation remained 3.3–3.5% – still above the Bank of Japan’s (BoJ) 2% target and, strikingly, the highest rate among G7 countries at that time . Much of this inflation has been cost-push: surging import prices (especially energy and food) and a weaker yen have driven prices up. For instance, food and energy together were major contributors, with spikes in items like rice (over 100% year-on-year price increase as of May 2025 due to a poor harvest) . Stripping out volatile components, underlying “core-core” inflation (ex-food and energy) is more modest (around 1.5% in mid-2025) , suggesting demand-driven price pressures are still mild. Thus, Japan faces an unfamiliar situation of above-target inflation, yet it is not accompanied by strong growth – indicating stagflationary tendencies.

Japan’s unemployment rate remains very low – around 2.5–2.6% in 2023–2024 . In fact, unemployment has hovered in the 2–3% range for years, one of the lowest in the developed world. On the surface this implies a healthy labor market, but it also reflects structural factors like a shrinking workforce (rather than robust job creation). The labor market is extremely tight: as of 2025 the jobless rate was ~2.5%, and labor force participation hit a multi-decade high (64%, the highest since 1998) . Japan’s labor force has been bolstered by more women and seniors working, yet total employment is barely rising (up ~1.1% in 2025) even as the adult population declines by ~0.2% annually . In short, unemployment is low largely because Japan’s working-age population is contracting, and labor shortages are common. This tight labor market has not translated into vigorous economic growth, but it has started to exert mild upward pressure on wages and automation investment (as discussed below).

Table 1: Key Macroeconomic Indicators – Japan

Indicator	2022	2023	2024 (est.)
Real GDP Growth (annual)	+1.0%	+1.9%	~0.8–0.9%
CPI Inflation (annual)	+2.5%	+3.3%	~2.2% (proj)
Unemployment Rate	2.6%	2.6%	~2.5% (proj)

Sources: IMF/OECD data (via Wikipedia) . GDP growth for 2024 is a forecast. Inflation is headline CPI. Unemployment is annual average.

These indicators highlight Japan’s predicament going into 2024–2025: economic growth is weak, inflation – once too low – is now uncomfortably high, and unemployment is too low (reflecting a labor squeeze rather than strong demand). This macroeconomic stagnation has deep roots in structural and demographic issues, which we examine next.

Demographic Challenges: Aging Population and Population Decline

Japan’s demographic trends are a fundamental drag on its economy. The country is aging faster than any other major economy, with a rapidly declining population. According to the latest data, more than 1 in 10 Japanese are now aged 80 or older, and almost one-third of the population is over 65 – by far the highest elderly share in the world. The population peaked at around 128 million in the early 2010s and has since begun an inexorable decline (estimated at ~124 million in 2023). Birth rates have been extremely low (around 1.3 fertility rate), leading to shrinking younger cohorts. Prime Minister Fumio Kishida warned in 2023 that “Japan is standing on the verge of whether we can continue to function as a society” due to the twin crises of falling birth rates and a growing elderly population . This statement underscores how demographic headwinds threaten the very fabric of Japan’s economy and social systems.

The implications of these trends are severe:

• Shrinking Workforce: Every year Japan loses working-age population. The domestic labor force (15–64) has been contracting, with the total number of employed persons buoyed only by higher participation of women and seniors. By one estimate, the adult population fell by 0.2% in 2024 . Projections are grim – government forecasts see the population plummeting to 87 million by 2070, with only ~45 million people of working age . A labor shortage is already evident; Japan could be short 11 million workers by 2040 at current trends . This labor scarcity caps potential GDP growth and makes it hard for businesses to expand domestically.
• Strain on Public Finances: With a smaller base of workers and taxpayers but more retirees, Japan’s fiscal health is under pressure. Age-related spending (pensions, healthcare) is soaring while the tax base shrinks. The IMF warned that the aging and shrinking population will strain Japan’s public finances as social security costs rise and debt mounts . Indeed, Japan already has the highest public debt-to-GDP ratio in the world (~260% of GDP) , and an increasing share of that spending goes toward supporting the elderly. This leaves less fiscal room for growth-enhancing investments.
• Lower Domestic Demand: An older society tends to save more and spend less, dampening consumption. Many elderly live on fixed incomes. Moreover, with population decline, the domestic market is literally getting smaller each year, discouraging business investment. Sectors from housing to consumer goods face shrinking customer bases. This “demographic deflation” contributes to Japan’s chronic low consumption problem (discussed further below).
• Challenges to Innovation and Productivity: An aging workforce can also mean fewer dynamic, young entrepreneurs and a slower adoption of new technologies. Although experience is valued, the loss of young talent and reluctance to bring in immigrants (Japan’s immigration levels remain very low) reduce the economy’s vigor. By 2022, almost half of Japanese firms relied on workers over 70 to fill labor gaps – highlighting both the work ethic of seniors and the difficulty in finding younger employees. Japan is trying to cope by encouraging seniors to work longer and raising the retirement age, but this is a limited solution.

In summary, Japan’s demographic outlook is a significant structural drag on growth. Fewer workers and consumers mean lower potential GDP growth – estimated at only ~0.5% annually – and a continual headwind to demand. The aging society also forces high public spending that adds to debt. These demographic realities form the backdrop for Japan’s economic struggles in 2024–2025, and they amplify other issues like labor market rigidities and weak consumption.

Stagnant Wages, Low Productivity, and Labor Market Dynamics

One of the clearest signs of Japan’s economic malaise is stagnant wage growth despite a tight labor market. For decades, Japanese worker pay has barely risen. Recently there have been some encouraging headlines – for example, in the 2024 spring labor negotiations (shuntō), major firms announced average wage hikes of around 5.2–5.3%, the largest raises since the 1990s . These announcements, following a 5% average hike in 2023, led to hopes of a virtuous cycle of rising incomes and spending. However, the reality in the data has been disappointing. Total wages have increased only ~1% year-on-year (as of May 2025), and after inflation, real wages are actually down ~3% . In other words, price increases have outpaced pay hikes, so workers’ purchasing power is still eroding. Even “scheduled” base pay (excluding bonuses and overtime) was only up 2.1% in May 2025 from a year earlier, far below the prior year’s increase .

Several factors explain this wage stagnation:

• Labor Market Structure: Japan’s labor market is dualistic – a core of lifetime employees with modest but secure pay, and a growing segment of part-time/contract workers with much lower wages and few raises. Companies have contained labor costs by using non-regular employees. Unions negotiate primarily for core workers at big firms; small firms and non-unionized sectors see less wage growth. This has kept overall wage growth subdued even when headline raises occur at major companies.
• Deflationary Mindset: After decades of deflation/low inflation, employers and workers both became accustomed to flat prices and wages. Employers have been reluctant to grant raises, and workers haven’t demanded them, prioritizing job security. This mindset is only slowly changing now that inflation has appeared. The “virtuous cycle” of wage-price growth is not yet entrenched; as the Bank of Japan noted, they need to see sustained wage increases to consider inflation stable .
• Productivity and Profits: Historically weak productivity growth (discussed next) limited the scope for higher wages. Many firms, especially in services, operated on thin margins and could not afford raises without productivity gains. Additionally, companies prioritized hoarding cash reserves and paying down debt rather than boosting salaries (a legacy of the 1990s bust and deflationary caution). Only recently, with corporate profits at record highs in nominal terms (thanks in part to a weaker yen and cost cutting), have firms begun to seriously consider larger pay raises.

Compounding the wage issue is Japan’s low productivity. By international standards, Japanese labor productivity is poor given the nation’s development level. Japan ranks last among G7 countries in labor productivity, and in 2023 it was only 29th out of 38 OECD nations . In 2023, Japan’s output per hour worked was about $56.8 (PPP) – roughly 60% of the U.S. level and comparable to economies like Poland or Estonia . This productivity shortfall has persisted for decades; Japan has been the G7’s worst productivity performer every year since at least 1970 . Several issues contribute to low productivity:

• Service Sector Inefficiencies: Japan’s large service sector (about 70% of GDP) is fragmented and labor-intensive. Industries like retail, food service, and caregiving have low productivity and have been slow to consolidate or adopt IT solutions, partly due to cultural preferences for human-intensive service and regulatory barriers.
• Lagging Digital Adoption: In the digital era, Japan has fallen behind in software, IT services, and digital transformation. Many business processes remain manual or paper-based (the persistence of fax machines and “hanko” seals is often cited). As a result, productivity gains from the IT revolution have been smaller than in the US or Europe. (In fact, one analysis found IT sector productivity in Japan fell by 13% from 2019–2023, highlighting difficulties in digital adoption .)
• Work Practices: Traditional Japanese work culture, emphasizing long hours and group effort over output, historically led to inefficiencies. While Japan has significantly reduced its notorious working hours – average annual hours worked fell from 1,800+ in 2000 to around 1,600 by 2018 – this was achieved by cutting overtime rather than boosting output. Average monthly hours worked hit a record low in 2024 . Shorter hours can improve quality of life, but without productivity innovations, they also mean lower total output. Indeed, Japan’s real GDP growth has lagged despite fewer hours, widening the productivity gap with countries like the US .
• Capital Allocation and Innovation: Japanese firms have been conservative in capital investment in the domestic economy. There has been under-investment in automation and new business models in some sectors (though this is now improving due to acute labor shortages spurring investment in labor-saving technologies ). Japan was a leader in manufacturing efficiency in the 20th century (e.g. Toyota’s lean production), but in newer high-productivity sectors (digital services, software, healthcare tech), it has not been at the forefront. R&D spending is high (around 3.7% of GDP) but commercialization and startup activity remain relatively low, hampered by risk aversion and bureaucracy.

The combination of stagnant wages and low productivity creates a vicious cycle. Low productivity growth limits wage hikes, and subdued wage income in turn restrains consumption and incentives for firms to invest in productivity-enhancing innovations. Until very recently, Japan was stuck in this low-wage, low-inflation equilibrium. There are some signs of change – e.g. 2023 and 2024 saw the fastest nominal wage growth since the 1990s – but so far real incomes are still declining once inflation is accounted for. Unlocking stronger wage growth will likely require sustained productivity improvements and perhaps further labor market reforms (such as increasing labor mobility, equal pay for non-regular workers, and greater use of high-skilled immigration to alleviate shortages).

Structural Economic Issues: Deflationary Mindset, Low Consumption, and Investment Patterns

Beyond the headline data, Japan’s economic woes in 2024–2025 are rooted in structural problems that have accumulated over the “Lost Decades” since the 1990s. A key issue is the persistent deflationary mindset that took hold during years of stagnant or falling prices. For roughly 20 years, Japan experienced deflation or ultra-low inflation, leading consumers and businesses to behave in ways that perversely reinforced economic stagnation:

• Cautious Consumers: Japanese households became extremely cautious spenders. With prices stable or falling, there was little urgency to consume; instead, people tended to save. Uncertain job prospects and stagnant wages (as discussed) also led to higher precautionary savings. Even when interest rates were zero, the fear of future insecurity (especially in an aging society) kept the household saving rate relatively high. The result was chronically weak domestic consumption demand, which persists to this day. For example, even in recent quarters when nominal consumer spending rose, real consumption has been “muted” once inflation is factored in . In early 2024, consumption was actually a soft spot in the economy, falling in real terms as rising prices outpaced wage gains . Overall, private consumption in Japan (roughly 55% of GDP) has grown very slowly over the long term, with periodic hits from tax hikes and crises erasing gains.
• Corporate Caution and Low Investment: Japanese firms also adopted a defensive posture. During deflation, many companies hoarded cash instead of investing, since growth opportunities seemed limited and prices were falling. This led to the famous corporate cash hoards – Japanese companies have amassed hundreds of trillions of yen in cash reserves over the years . While high savings made them financially stable, it meant fewer investments in new plants, equipment, or ventures that could have stimulated growth. Private domestic investment in Japan has been modest, with firms often preferring to invest overseas (where growth prospects were better) or simply not invest at all. Corporate Japan became extremely risk-averse, focusing on cutting costs and surviving rather than expanding. Only recently is this trend starting to reverse: with labor so scarce and profits up, companies are finally beginning to deploy cash into capital expenditures and wage increases. There are signs that “years of hoarded cash on corporate balance sheets” are peaking and even declining as firms boost capex and pay . For instance, business capital spending rebounded in early 2025 after a dip, and companies are investing in automation, digitalization, and supply chain resilience, partly to cope with labor shortages . Still, the legacy of underinvestment means Japan’s capital stock growth and productivity have lagged.
• Deflationary Pricing and Low Profit Margins: Culturally and structurally, Japan developed a norm of low prices and narrow profit margins. Companies often competed on price and were hesitant to raise prices for fear of losing market share, given consumers’ sensitivity. This “low-price” equilibrium meant many goods and services in Japan remained cheap by global standards – good for consumers in the short run, but it squeezed business profitability and wages. As one analysis noted, high-quality products and services in Japan are often undervalued and low-priced, which is one reason cited for Japan’s low productivity (output is high, but revenue generated is low) . This is essentially a hangover from deflation: firms never developed pricing power or the habit of passing on costs. Even in 2022–23, when input costs rose, many firms were reluctant to hike prices, initially compressing margins. Only when cost pressures became unbearable did widespread price hikes occur in 2023, and even then businesses worried about consumer pushback. This conservative pricing behavior limited the transmission of monetary easing to higher inflation for many years (the BoJ struggled to hit 2% inflation partly due to this mindset).
• Public Policy Patterns: Structurally, Japan has relied heavily on fiscal stimulus and public works to prop up demand, rather than private sector-led growth. Since the 1990s, the government repeatedly initiated large spending packages (often infrastructure projects) to boost the economy out of slumps. While this prevented deeper recessions, it also contributed to the massive public debt and arguably kept zombie companies alive (through bailouts and cheap credit), dampening productivity. The frequent use of short-term stimulus may have hindered more painful but necessary structural reforms. It also didn’t fix the underlying issues of weak consumption and private investment. Likewise, on the monetary side, the BoJ’s extreme easing (zero/negative rates and quantitative easing) became a long-term crutch – necessary to avoid deflationary collapse, but insufficient to spark self-sustaining growth. In effect, Japan became stuck in a low-growth equilibrium, requiring constant stimulus just to maintain mild growth, because the private sector was mired in a deflationary, risk-averse mindset.
• Consumption Tax Hikes: Another structural factor affecting consumption is Japan’s efforts to address its fiscal deficit via consumption tax increases. The national sales tax was raised multiple times (from 5% to 8% in 2014, and to 10% in 2019). Each hike had a chilling effect on consumer spending – for example, the 2014 hike caused a sharp drop in consumption and a recession. These policy moves, while aimed at fiscal sustainability, inadvertently reinforced the stop-and-go nature of Japan’s economy and the cautious behavior of consumers (who time purchases before hikes and then retrench after). The result is that private consumption never built steady momentum.

In 2024–2025, some of these structural issues are slowly beginning to shift. With inflation finally present, there are tentative signs that the deflationary psychology is breaking: consumers are reportedly starting to expect some price increases, and companies are testing their ability to raise prices and wages. The government under Kishida has also emphasized a “New Capitalism” agenda to encourage wage hikes and investment in people. However, these changes are nascent. Japan still faces chronically low domestic demand – even the BoJ acknowledges “weak domestic demand, especially private consumption” is a concern . Until Japanese households feel confident enough to spend more of their savings (which are considerable) and until corporations shift decisively from hoarding cash to investing it, the economy will likely continue to underperform. In essence, overcoming the ingrained deflationary mindset is as big a challenge as any economic policy.

Monetary and Fiscal Policy: BoJ’s Ultra-Easy Stance and Government Stimulus

Japan’s policy choices in monetary and fiscal realms have been unconventional and expansive, yet they also reflect the constraints of Japan’s situation. As of 2024–25, the Bank of Japan (BoJ) and the government are delicately trying to normalize policy after years of extreme measures, but they face a dilemma: tighten too early and risk choking the fragile economy, or maintain stimulus and risk higher inflation or debt problems.

Monetary Policy: The BoJ has been the most dovish major central bank for decades. It pioneered zero interest rates in the late 1990s, quantitative easing (QE) in the early 2000s, and later set a negative policy interest rate (-0.1%) from 2016 onward to combat deflation . It also implemented yield curve control (YCC) in 2016, capping the 10-year government bond yield around 0% by committing to unlimited bond buying. These policies kept borrowing costs ultra-low and aimed to spur lending and inflation. However, one side effect was a sharply weaker yen in recent years, especially when the U.S. Fed and other central banks hiked rates in 2022–2023 while the BoJ stood pat. By late 2022, the yen had lost over 20% against the dollar, prompting some intervention . A cheap yen helped exporters and boosted corporate profits (in yen terms) but also drove up import prices, contributing to the inflation spike in energy and food costs . The BoJ faced criticism for allowing the yen to slide and inflation to rise above target, but it argued that underlying inflation was still fragile and needed support.

As inflation and wages started to pick up, the BoJ in late 2023–2024 finally began adjusting policy. In March 2024, the BoJ ended its negative interest rate policy, raising the short-term rate to 0% and signaling the end of an era of negative rates . It also began phasing out yield curve control, allowing long-term yields to rise more freely . BoJ Governor Kazuo Ueda declared that “unprecedented monetary easing is now over” , marking a shift toward policy normalization. This shift was motivated by signs that the BoJ’s 2% inflation goal could finally be met “sustainably and stably,” with a “virtuous cycle” of wage and price increases in motion . Importantly, the record wage hikes in 2023–24 gave the BoJ confidence to move – Ueda pointed to the 5.3% average pay hikes in 2024’s labor talks (the highest in decades) as evidence that Japan might be escaping deflation .

However, the BoJ remains extremely cautious. Ueda emphasized that further rate increases will be gradual and limited, and two BoJ board members even opposed ending the negative rate (showing concern about weakening the economy) . The BoJ expects only modest growth (around 0.5%–1%) in coming years , and it projects inflation will fall back near 2% by 2025 – essentially a soft landing scenario. If inflation or expectations rise more than anticipated, the BoJ may be forced to tighten faster , but for now it is signaling an extended period of low rates. In short, monetary policy is only inching toward normalization, after having been ultra-loose for a very long time. The legacy of that long easing is visible: the BoJ’s balance sheet is enormous (it holds roughly half of government bonds outstanding), and although negative rates have ended, Japan still has the lowest interest rates in the G7. This limited Japan’s currency and capital market attractiveness when others had higher yields, contributing to yen volatility.

One reason the BoJ must move gingerly is the interplay with fiscal policy. Japan’s government has run large fiscal deficits for years, and total public debt is about 263% of GDP (2022) , by far the highest in the developed world. The BoJ’s low rates have kept the government’s debt service costs manageable – effectively enabling the state to sustain such debt. A rapid rise in interest rates could severely strain government finances (as interest on bonds would climb), so both the BoJ and government have incentive to avoid a spike in yields. Observers note that Japan’s large debt burden has tied the BoJ’s hands to some extent, forcing it to cap yields (through YCC) to maintain fiscal stability . This dynamic may be one reason the BoJ was slower than other central banks to tighten policy in 2022–23.

Fiscal Policy: On the government side, Japan has continued to use fiscal stimulus to support the economy, even as it pledges longer-term consolidation. In late 2022 and again in 2023, the government passed multi-trillion-yen spending packages aimed at easing the impact of inflation on households (for example, subsidies for energy bills) and stimulating growth. As a result, the primary fiscal deficit (which excludes interest payments) remained very high – around 6.4% of GDP in 2024 – instead of shrinking. Essentially, even in 2024 with the pandemic over, Japan was still deploying fiscal stimulus akin to crisis times. This reflects the political priority of keeping the economy afloat (especially with an election horizon) and addressing voter concerns about rising living costs. It also reflects the difficulty of weaning the economy off government support. Every time Japan tried fiscal austerity in the past (e.g. spending cuts or tax hikes), growth faltered, so policymakers are hesitant to tighten too much.

That said, the government is aware of the debt problem. Kishida’s administration has discussed fiscal reform and set a goal to achieve a primary balance surplus by the early 2030s. The hope is that if nominal GDP and inflation rise (a “nominal GDP renaissance” as some call it ), tax revenues will increase and reduce the debt-to-GDP ratio over time without harsh austerity. Indeed, recent nominal GDP growth (boosted by inflation) has improved tax receipts. For now, however, fiscal policy remains expansionary. Public spending, especially on social security and stimulus measures, stays elevated. Japan continues to invest in infrastructure resilience, digitalization, and defense (the latter is rising due to security concerns), all contributing to spending. The trade-off is that debt keeps growing, but because it’s domestically held and the BoJ can manage yields, there is no immediate funding crisis. The risk is longer-term – if investor confidence wavers or inflation forces much higher interest rates, Japan’s debt could become unsustainable. Credit rating agencies still rate Japan A/A+ with stable outlook, implying trust that Japan can manage its debt  , but it’s a point of vigilance.

In sum, policy makers are walking a tightrope: the BoJ is slowly ending its experiment with negative rates and massive QE, and the government is talking about fiscal consolidation, yet both remain ready to reverse course if the economy falters. This cautious normalization is because Japan’s economy, unlike the U.S. or Europe, still lacks strong self-driven momentum. The BoJ even stated it would “remain on hold for at least the rest of this year (2025)” barring major changes . The heavy involvement of policy in propping up the economy is itself a sign of structural weakness. Other G7 economies have mostly moved to tightening cycles, but Japan is the outlier still effectively stimulating (or only mildly tightening) because its recovery is weaker. This difference in policy stance also had international repercussions (like the yen’s depreciation and capital outflows).

International Headwinds: Trade, Global Economic Shifts, and External Factors

Japan’s economic performance is also undermined by external factors, including trade challenges and global shifts that have not been in its favor. International trade has traditionally been a growth engine for Japan (exports are ~15–17% of GDP ), but lately trade has been a source of drag:

• Trade Frictions with the United States: As of 2024, Japan faced a significant trade dispute with its largest export market, the U.S. Without a new bilateral trade agreement, many Japanese exports to the U.S. have been subject to tariffs – generally 10% on most goods and a hefty 25% on autos . These tariffs hark back to Trump-era protectionism and the lack of a comprehensive free trade deal after the U.S. left the TPP. By 2024, the U.S. had imposed these tariffs unilaterally, and negotiations were ongoing. The uncertainty was considerable: Japanese automakers – a pillar of Japan’s economy – were hit particularly hard by the 25% U.S. import tariff. The threat of even higher tariffs loomed if a deal wasn’t reached . This weighed heavily on Japan’s outlook because the U.S. is Japan’s top export destination (over ¥21 trillion of goods exports in 2024) . In early 2025, evidence of the damage emerged: Japanese goods exports overall were down ~1.7% YoY in May 2025, and exports to the U.S. plunged 11% YoY (with auto exports to the U.S. collapsing by 24.7%) . Such declines in export sales directly hit Japan’s manufacturing sector and national income. (By mid-2025, Japan and the U.S. did reach a partial deal to moderate tariffs to a “reciprocal” 15% rate on some items, according to news reports, but the overall trend of U.S. protectionism remains a concern.) The trade tensions highlight Japan’s vulnerability to shifts in U.S. trade policy, given its reliance on auto, machinery, and electronics exports.
• Global Slowdown and Key Markets: The broader global economic environment in 2024–2025 is one of cooling growth, which hurts Japan’s export-dependent industries. China – the world’s second-largest economy and Japan’s close trading partner – has been experiencing slower growth and various economic troubles (real estate downturn, etc.), reducing its import demand. Europe’s economy has been sluggish with energy price shocks and tightening monetary policy. Emerging markets have been mixed. All this means external demand for Japanese goods is not booming. Japan’s exports of capital goods, electronics components, and consumer products have faced headwinds as worldwide investment and consumption softened. For example, demand for Japanese machinery from China and East Asia has been weaker due to China’s slowdown and global tech cycles.
• Supply Chain Adjustments: Geopolitical shifts are also affecting trade. U.S.-China decoupling pressures have implications for Japan, which is deeply integrated in Asian supply chains. Japan must navigate new rules on technology exports (like semiconductor equipment) and build more resilient supply chains for critical inputs (the pandemic and war in Ukraine underscored this need). While some Japanese firms benefit from “friend-shoring” (relocating production out of China to Japan or Southeast Asia), these adjustments carry costs and uncertainties. In some cases, Japan faces competition from South Korea, Taiwan, and others for high-tech export markets, and maintaining its edge requires continuous innovation.
• Energy Import Costs: Japan is a resource-poor nation and heavily reliant on imports for fuel (oil, gas, coal). The surge in global energy prices in 2022–2023 (exacerbated by the Ukraine war) hit Japan hard. It led to large trade deficits as import bills spiked. Even though a weaker yen boosted the yen-value of exports, it also inflated the cost of imports, especially LNG and oil. Japan has had to restart some nuclear reactors and invest in renewables to mitigate this, but in the near term, high import costs have been a drag – effectively transferring income abroad. In 2022, Japan’s terms of trade deteriorated severely, causing one of the biggest trade deficit years in decades. By 2023–24, energy prices moderated somewhat, and the yen recovered a bit from its lowest levels, improving the situation. Yet, Japan’s trade balance remains delicate. The country used to run consistent trade surpluses, but since the 2011 Fukushima nuclear accident (after which it shut down reactors and imported more fossil fuels), trade surpluses have largely vanished . Without a strong trade surplus, Japan can’t rely on exports to offset weak domestic spending as much as before.
• International Tourism: One brighter spot externally has been inbound tourism – after COVID restrictions eased, Japan saw a rebound in foreign tourists (notably from other parts of Asia). This helps services exports (travel, hospitality). However, even a full restoration of tourism (which was ~8% of GDP in pre-pandemic direct+indirect impact) isn’t enough to counteract the larger structural drags, but it does provide some support to local economies.

Overall, the net external contribution to Japan’s GDP has been underwhelming or negative in recent years. For example, in late 2024, a rise in imports (as domestic demand picked up slightly and energy prices rose) actually made net exports a drag on GDP . Japan still earns substantial income from overseas investments (interest and dividends from its foreign assets, since it’s a major creditor nation), and that investment income actually now outweighs the trade balance in sustaining the current account surplus . But those earnings don’t directly create jobs at home the way export manufacturing does.

In comparison to some peers, Japan is missing out on certain global growth drivers. The U.S., for instance, saw a manufacturing renaissance in areas like shale energy and tech, and benefits from population growth and near-self-sufficiency in energy. Germany and Korea leveraged demand for capital goods from China (though Germany now struggles as China slows). Smaller advanced economies (e.g. Australia, Canada) benefit from commodity exports or immigration. Japan’s global positioning (high-end manufacturing, autos, electronics) is solid but not as dominant as in the past, and it doesn’t have other engines (like commodities or Big Tech platforms) to fall back on.

Additionally, currency fluctuations play a role: the yen’s weakness (it hit multi-decade lows vs USD in 2022–23) made imports expensive (fueling inflation) even as it boosted exporters’ profits. If the global economy worsens and a risk-off sentiment strengthens the yen (as often happens), Japan could face the opposite problem of a too-strong yen squeezing exporters – a scenario that hurt growth in the 2010s. Thus, external conditions can cut both ways, and Japan finds itself exposed to global risks more than sources of global opportunity.

International Comparison: How Japan Stacks Up Against Other Developed Economies

To put Japan’s economic underperformance in context, it is useful to compare it with other major developed economies. Japan’s struggles are in some ways unique and in other ways an extreme version of challenges many advanced countries face. Here are some relative weaknesses of Japan when compared to its peers:

• Economic Growth: Japan has had the slowest growth among G7 economies over the long term. Its “Lost Decades” since the 1990s saw almost no net growth in nominal terms – remarkably, Japan’s nominal GDP in 2023 ($4.2 trillion) was lower than in 1995 ($5.5 trillion) when measured in USD (partly due to currency shifts, but even in real terms growth has been minimal). No other G7 economy has experienced such a long stagnation. By contrast, the U.S. economy roughly doubled in size since 1995, and even Europe grew significantly. In the 2010s, Japan’s real GDP growth averaged ~0.5–1% per year , versus ~2% in the U.S. and ~1.5% in the Eurozone. Even considering GDP per capita (which adjusts for population shrinkage), Japan’s growth has been subpar (though per capita it narrowed the gap somewhat). As of 2023–2024, Japan’s growth remains below that of the U.S. (which, despite high inflation, grew about 2% in 2022–23) and similar to or lower than European peers (e.g. Eurozone ~0.5% in 2023, UK ~4% in 2022 but flat in 2023, etc.). Japan’s growth in 2024 is forecast around 0.6–0.9%, which is weaker than the U.S. (~1.5–2%) and in line with sluggish European economies .
• Inflation and Monetary Policy: Japan was long an outlier with too low inflation while others had around 2%. In 2022–2023, the situation inverted: others faced high inflation (U.S. and Europe hit 5–10% inflation), and Japan at ~3% was still lower but for Japan this was high. By 2024–25, inflation moderated elsewhere (U.S. back near 3%, Eurozone ~5% down to 3%), whereas Japan’s ~3% became temporarily highest in G7 as others fell faster. The BoJ’s continuing ultra-low interest rates stand in stark contrast to the U.S. Federal Reserve or Bank of England, which raised rates to 4–5% by 2023. This divergence has international implications (capital flows, yen value) and reflects Japan’s relative weakness – it could not afford to tighten without risking recession, whereas others could because their economies were hotter. In essence, Japan’s normalization is years behind: the Fed began raising rates in 2015 and aggressively in 2022, the European Central Bank in 2022, but the BoJ only ended negative rates in 2024 . This underscores Japan’s persistent demand shortfall relative to peers.
• Labor Market and Demographics: Most developed countries are aging, but Japan is decades ahead in this trend. Japan’s old-age dependency ratio (retirees per working-age person) is the highest in the world. Countries like Germany, Italy, and South Korea are following in Japan’s footsteps with low birth rates, but Japan started earlier and has virtually zero immigration to counteract it. The U.S., Canada, Australia, and to a lesser extent UK and France, still have growing populations (thanks to immigration and higher fertility) – a key advantage over Japan. For example, while Japan’s population is declining, the U.S. population grew about 0.5–0.7% per year in recent years. Workforce growth in Japan is negative, whereas the U.S. labor force is expanding modestly and countries like Canada and Australia grow faster due to immigration. This means Japan’s potential growth is lower than virtually all peers. The unemployment rate in Japan (~2.5%) is much lower than in the U.S. (~3.5%) or Eurozone (~6%), but as noted, Japan’s low jobless rate is not due to a booming economy but a shrinking labor pool and labor practices that avoid layoffs. Other countries might envy low unemployment, but Japan’s case comes with the baggage of labor shortages and a subdued economy.
• Productivity and Innovation: As discussed, Japan’s labor productivity is the lowest in the G7 (about 60–70% of U.S. levels) . The U.S. leads in productivity among large economies (with its tech-heavy, dynamic economy). European G7 members (Germany, France, UK, Italy, Canada) all surpass Japan in productivity per hour – even historically slower economies like Italy are higher. Moreover, Japan’s gap has widened over time (it was ~70% of U.S. productivity in 2000, now ~60%) . In innovation, Japan remains a top patent filer and excels in certain manufacturing technologies, but it has not produced equivalents of Silicon Valley tech giants or dominant digital firms. The U.S. and China captured the digital economy’s growth; even Europe has some global firms in luxury, pharma, etc. Japan has world-leading companies in autos and electronics hardware, but in software, internet, and services, it lags. Its startup ecosystem is relatively small. This translates to slower growth in high-value sectors compared to, say, the U.S. or even parts of Europe.
• Corporate Performance and Governance: Japanese firms are often criticized for low return on equity and bloated balance sheets (lots of cash, cross-shareholdings). Corporate governance reforms in the 2010s (encouraging unwinding cross-shareholdings, improving governance codes) have helped, but many companies still prioritize stability over high returns. By contrast, U.S. firms are leaner and quicker to adapt (albeit sometimes more prone to hire-and-fire). European firms vary, but many have undergone restructuring that Japanese firms avoided. One metric: Japan’s TOPIX stock index hit a 33-year high in 2023, which was positive news, but this rally was partly driven by foreign investors pushing for better capital efficiency (less cash hoarding, more buybacks/dividends) . Japanese equities still trade at lower price-to-earnings ratios than U.S. peers, reflecting investor wariness of lower profitability. So in capital markets dynamism, Japan trails the U.S. clearly, and is trying to catch up to European standards of corporate governance.
• Female and Immigrant Workforce Integration: Japan has improved female labor force participation (now higher than the U.S. in participation rate after policy efforts), but many women are in part-time or lower-track jobs. Other advanced countries have made more progress in women reaching leadership positions and full employment levels. On immigration, Japan is an outlier – while Western countries have boosted labor supply via immigration (the U.S., Canada, Australia, UK, and even Germany in recent years), Japan has admitted only very limited numbers of foreign workers (though it has increased technical trainees and eased some visa rules, it’s nowhere near enough to offset population decline). This reluctance puts Japan at a disadvantage in rejuvenating its workforce compared to countries that can attract young workers from abroad.

To summarize the comparison: Japan’s economy has been struggling relatively – it has the slowest growth, worst demographics, lowest productivity, and most persistent deflationary tendencies among its peers in the developed world. On the positive side, Japan enjoys social stability, low unemployment, and still a high standard of living (it remains the world’s 3rd largest economy by nominal GDP in 2024, though recently slipped behind Germany in USD terms due to the yen ). But in terms of dynamism, Japan has been left behind by the U.S. and even some European economies. Its challenges foreshadow issues other aging societies will face, but Japan’s are more acute. As one metric of lost standing: from 1995 to 2023, Japan’s share of the global economy (nominal GDP) fell from ~17% to around 4% , and it dropped from the 2nd largest economy to 3rd (and soon 4th as India catches up). This relative decline is largely due to its domestic stagnation while others grew. Japan still has immense wealth and technological prowess, but unlocking them for growth remains an ongoing struggle.

Conclusion

In 2024–2025, the Japanese economy finds itself at a crossroads, performing poorly by most measures despite some hopeful signs. Macroeconomic data paint a picture of stagnation: low growth around 1%, inflation above target but largely driven by costs, and unemployment so low it signals labor scarcity rather than robust job creation. Demographic headwinds – an aging, shrinking population – act as a heavy anchor on growth and public finance, creating a structural labor shortage and dampening consumption. The labor market and productivity issues mean that even a tight job market hasn’t translated into strong wage gains or efficiency improvements; Japan continues to grapple with long-term productivity lags and only modest wage growth, eroding consumers’ purchasing power. Deep-seated structural problems, notably a deflationary mindset that fostered weak consumption and corporate risk-aversion, still hinder a full-throated economic revival.

While Japan’s policymakers have responded with aggressive monetary easing and fiscal stimulus, these have kept the economy on life support rather than restored strong growth. The BoJ’s ultra-easy policy (now slowly ending) contributed to a weaker yen and some inflation, but not yet to a self-sustaining inflationary boom. The government’s spending has averted worst-case recessions but at the cost of an ever-mounting debt load. Externally, global forces have offered more challenges than boosts: trade disputes (particularly with the U.S.), a global slowdown, and high import costs have undercut the traditional export-led growth model.

Compared to its peers, Japan’s economy is underachieving – with lower growth and productivity, and the unique burden of rapid aging. Other advanced economies have their issues (for instance, Europe also faces energy shocks and slow growth), but Japan’s combination of problems is singularly daunting. Yet, there are glimmers of optimism: the fact that inflation and wage hikes have finally appeared could mark the beginning of the end of deflationary stagnation. Some experts speak of a possible “Nominal Renaissance” for Japan , where a shift in societal expectations allows for modest inflation, wage growth, and a break from the zero-growth trap. Indeed, the latest developments – companies starting to invest cash, workers getting larger raises, the BoJ moving away from negative rates – suggest Japan is cautiously moving in a new direction.

However, the road ahead is fraught with risks. To truly overcome its poor economic performance, Japan will need to pursue deep structural reforms: raising productivity through innovation and digitalization, liberalizing labor and product markets, empowering its shrinking workforce (including women and older workers) and supplementing it smartly with foreign talent, and stimulating domestic demand (perhaps through tax reforms or wealth redistribution to younger generations). It must do all this while managing fiscal consolidation to rein in debt and continuing to support an aging society – a delicate balancing act. The experience of the past decades shows that there are no quick fixes; Japan’s malaise is multi-factorial and entrenched.

In conclusion, Japan’s economy in 2024–2025 is performing poorly due to a confluence of macroeconomic stagnation, adverse demographics, wage and productivity slumps, ingrained deflationary behavior, policy constraints, and external headwinds. It is a cautionary tale and a test case: how can a wealthy nation revive growth in the face of demographic decline and after years of deflation? The world is watching as Japan attempts to rewrite its economic playbook to finally leave the Lost Decades behind. The solutions will likely be as complex as the problems, requiring persistence and possibly a cultural shift in how businesses and consumers think. As things stand, Japan’s economic recovery is fragile and slow – a stark contrast to the more dynamic growth trajectories of other developed economies, underscoring the unique challenges that Japan must overcome to restore its economic vitality .

Sources:

• Deloitte Insights – Japan Economic Outlook, July 2025 
• Deloitte Insights – Wage and labor market analysis 
• FocusEconomics – Japan Inflation report, May–June 2025 
• World Economic Forum – Japan’s Aging Population report (2023) 
• Japan Times / Jiji – Labor productivity rankings (Dec 2024) 
• Wikipedia (IMF/OECD data) – Economy of Japan (latest indicators and historical context) 
• Kyodo News – BoJ policy change and remarks (Mar 2024) 
• Nikko Asset Management – Commentary on structural issues (June 2025) , etc.
• IMF Article IV (2024) – Fiscal deficit and outlook .
• (Additional citations embedded above)