Japan Is Doing Everything Wrong With Its Economy And Its Working

TITLE: Japan is doing everything ‘wrong’ with its economy. And it’s working CHANNEL: ThePrint DATE: 2026-04-23 URL: https://www.youtube.com/watch?v=uP-iwXDv32Q ---TRANSCRIPT--- Hello and welcome to The Print. This is Bidisha and you’re watching Economics. This week I want to take you through an idea that seems counterintuitive, almost like an economic paradox. Japan is doing everything that, according to textbook macroeconomics, should not work. And yet, it is working.

Let me set up this puzzle for you. Japan today has low economic growth, under 1%. A rapidly aging population, a shrinking workforce, and one of the highest public debt levels in the world. By conventional logic, this combination should signal weakness. But that’s not what we see. Instead, Japan has near full employment. It has rising wages, it has stable demand, and inflation that is present but contained.

So, the question is, what are we missing?

Let me start with the labor market first. Because this is where the story really begins to diverge from theory. Unemployment in Japan is around 2.5%. That’s extremely low. At the same time, firms are struggling to find workers. In fact, the IMF’s latest Article IV consultation notes that labor shortages are at their highest since the early 1990s. Wages, in response, are rising at the fastest pace in decades.

Now, at this point, economic theory gives us a very clear expectation. And this is where I want to briefly explain a very important and key idea, the Phillips curve. In very simple terms, the Phillips curve tells us that when unemployment is high, inflation tends to be low. And when unemployment falls, when jobs are plentiful and workers are scarce, wages rise, costs increase, and inflation should technically go up. So, the expectation is straightforward. Low unemployment should lead to high inflation. You can think of it like a pressure in the system. When job market tightens, pressure builds, and that pressure usually shows up as higher prices.

Now, here’s where Japan becomes interesting. Because this is exactly the kind of situation where inflation should be rising sharply, but it isn’t. Yes, inflation has picked up, but it remains contained, stabilizing around the Bank of Japan’s 2% target. So, Japan is not behaving the way the Phillips curve would predict. This suggests that this relationship is weaker and more complex than we often assume.

Now, let’s take a look at the chart on your screen. Because this is where the story becomes even clearer. There are two panels that you see, and both are important. On the left, what you’re seeing is what drives Japan’s economic growth. These bars break growth into three components, capital, labor, and productivity. And the black line shows cumulative GDP growth over time. Now, here’s the key point. Labor, the gray portion, is often negative. This reflects Japan’s shrinking working-age population. So, demographically, labor should be pulling growth down. But overall growth continues. Now, the question is, why? Because capital investment and productivity are compensating. In other words, Japan is growing despite its demographic constraints.

Now, the right-hand panel breaks labor down even further. It shows two things, the size of the working-age population and labor force participation. What you’ll notice is that working-age population is consistently declining. That’s the blue bars pulling downward. But participation, the gray bars, is increasing. More women are entering the workforce. Older workers are staying employed longer. So, even though the population is shrinking, more people within that population are working. And that helps stabilize the labor market. There’s also a residual component capturing productivity within labor, which contributes positively at times.

So, what does this really tell us? It tells us that Japan is adjusting. It is offsetting demographic decline through higher participation and productivity. And that’s why you still see strong employment, rising wages, and stable demand.

Now, let’s come back to policy. Because if inflation is not overheating despite a tight labor market, what should policymakers do? The conventional answer would be tighten aggressively. Japan is doing this differently. After decades of ultra-loose monetary policy, it is now gradually normalizing carefully and deliberately. And more importantly, this transition is not happening in a crisis. Growth is holding, demand is stable, financial conditions are not showing major stress. Now, typically, raising interest rates in a high-debt, low-growth economy would be risky. But so far, Japan has been managing this transition without instability. Which suggests that policy normalization does not automatically lead to disruption if the underlying structure is strong.

And that brings me to the final point, growth. Japan has been growing at roughly 0.8%. By conventional standards, that sounds weak. But look at the outcomes. Employment is strong, wages are rising, demand is stable, and Japan continues to run a current account surplus supported by income from its overseas assets. So, we have to ask, if outcomes are stable, does low growth really mean underperformance? Or are we focusing on the wrong metric?

Japan is essentially forcing us to rethink what economic success looks like. Maybe it’s not about how fast you grow. Maybe it’s about how stable and resilient your system is. And this matters beyond Japan. Because countries like India are currently in a high-growth phase. But over time, demographics change, growth slows, and productivity becomes more important. When that happens, the question will shift. It will shift from how fast are we growing to how well are we functioning? Japan offers a preview of that future. It shows that an economy can remain stable even with slower growth if its institutions, labor markets, and policies are strong.

So, instead of asking why Japan is underperforming, perhaps we should ask, are our frameworks outdated? Because several assumptions that low unemployment automatically leads to high inflation, that high debt always leads to instability, that low growth means weakness, are all being quietly challenged. So, here’s the takeaway. Japan is not doing everything wrong. It is showing us that the rules themselves may need updating. It is not really an anomaly. It is a model that is asking to be understood.