(Bloomberg) — After three decades of stagnation, one of Japan’s most visible signs of rebirth can be found in the ancient cabbage fields that sprawl across the country’s southernmost main island.
Most read articles on Bloomberg
Surrounded by farmland in Kumamoto Prefecture, with easy access across the water to China, Taiwan and South Korea, apartment complexes, hotels and car dealerships are springing up near a new semiconductor factory. Run by global chip giant Taiwan Semiconductor Manufacturing Co. (TSMC), the factory began operating this year, and another is planned nearby. Wages and land prices in the area are soaring as demand flows into a burgeoning ecosystem of suppliers and related companies. Jobs are being created and the population is booming.
But in the town of Misato, less than an hour’s drive from the plant, a more familiar scene of economic crisis unfolds: shuttered stores line its once-bustling shopping streets, and the population is about a third of its peak of 24,300 in 1947. Instead, roaming deer and wild boar numbers have increased, forcing locals to set up nets to protect their crops.
On the main road that winds through the rice paddies, election posters for the long-running Liberal Democratic Party are lined up. One of them reads, “We want you to feel the economic revival.”
“We farmers are barely making a living, so it doesn’t really feel real,” said Kazuya Takenaga, 67, as he tended his asparagus and rice fields. Rising costs of fertilizer, energy and utilities have eaten into his income. His two sons have left town in search of other work.
The two contrasting images underscore the biggest challenge for whoever the LDP chooses as the next prime minister when it votes on Friday: ensuring a broad-based and lasting recovery across Japan, not just in certain regions.
One of the main reasons Prime Minister Kishida Fumio is stepping down despite Japan’s economic progress is that the Liberal Democratic Party, which has led Japan for all but a few years since the 1950s, is almost certain to win the next general election within the next 12 months, but the main reason is that the domestic opposition is weak and fragmented.
The story continues
During the election, LDP leadership candidates have addressed the issue of rural decline and the constant influx of people from rural areas to cities such as Tokyo. Some say TSMC’s example is a model that should be emulated across the country. Others emphasize tourism and incentives for companies and academic institutions to relocate to rural areas. All agree that more needs to be done to raise the birth rate, but few have any new or radical ideas.
If the recovery fails to broaden, Japan risks becoming entrenched in a bilinear economy with the most extreme concentrations of capital and people in the developed world. Companies will have a harder time securing sufficient staff and services, a phenomenon already evident in Tokyo and other major cities.
Japan is certainly on the radar of global investors. The stock market is nearing all-time highs. Deflation appears to have been overcome. Money is flowing into trade and investment, and the central bank is no longer attempting extreme stimulus measures. The Bank of Japan expects the economy to continue growing above its potential rate of 1% per year.
Japanese leaders are also growing more confident on the world stage. A U.S. ally, Tokyo long shunned displays of hard power but has rapidly increased its military spending in response to concerns about China and North Korea and is gaining influence on issues such as aid to Ukraine.
Following its defeat in World War II, Japan experienced rapid growth in the late 1980s, rising from the ruins of occupation to become the world’s second largest economy after the U.S. In 1992, when Japanese consumer electronics were still the envy of the world, Japan’s per capita gross domestic product surpassed that of the U.S. at $32,000.
Nearly three decades later, that figure is only $33,000, even as U.S. GDP per capita has more than tripled to $85,000 over the same period, according to International Monetary Fund statistics.
Japan’s population began to decline more than a decade ago and continues to fall by about 600,000 people each year. Combined with a lack of investment, the rapid population decline has devastated towns and villages across the country. The country has recently opened up a little to foreigners, but permanent immigration remains a political taboo.
Demographics are only part of the challenge. Japan’s productivity ranks 30th out of 38 countries in the Organization for Economic Cooperation and Development, a grouping of developed nations. Outside of autos, the recession has hit Japanese manufacturing hard. As foreign rivals have expanded their share of the world’s semiconductor production, Japan has been unable to keep up. Meanwhile, persistent deflation has led the government to make steady 2% inflation a key goal for revitalizing the country.
That long period of economic stagnation explains why there’s so much excitement now: Inflation has rekindled as companies decided to give their biggest wage hikes in decades, and the Bank of Japan raised interest rates this year for the first time since 2007. The government is also allocating about 4 trillion yen ($28 billion) to revive the semiconductor industry, a strategy to encourage companies such as TSMC, Samsung Electronics and Micron Technology to expand.
“This is a great place right now,” says Watanabe Chizuru, who moved from another part of the prefecture to take a management position at Japan Material. “I can see great things happening in the future.”
The city is also strategically important: The TSMC factory in Kumamoto has deepened ties between Japan and Taiwan, which could become a potential flashpoint in the region if China moves to seize the democratically ruled island. Such concerns also play a major role in Japan’s move to increase defense spending from 1% to 2% of GDP by 2028, and in outgoing Foreign Minister Kishida’s repeated warnings that Russia’s war in Ukraine could be a precursor to a similar conflict in Asia.
Some of that money goes to anti-ship missiles stationed at the Kumamoto base, which serves as the Western Regional Command for Japan’s ground forces, known as the Japan Ground Self-Defense Forces. Located roughly halfway between Tokyo and the Taiwanese capital, the base would likely play a key role if Japan were embroiled in a regional war. Kumamoto recently hosted an exhibition basketball game against a Taiwanese professional team, signaling deepening ties with an influx of engineers and factory managers from overseas.
For Kumamoto Governor Takashi Kimura, boosting the city’s economy could help alleviate the problem of low birth rates and the exodus of young people to cities such as Tokyo. If people are more enthusiastic about the future, they’re more likely to have families and stay in their hometowns, he said. He added that the growth of Kumamoto’s semiconductor supply chain will eventually spread to economically vulnerable areas of the prefecture. One local financial group estimated that the semiconductor manufacturing project could generate about $80 billion in economic activity by 2031.
“Our economy has been closed for 30 years,” Kimura said in an interview, “but Kumamoto’s opening up to Asia shows the way to Japan’s economic recovery.”
But pessimism runs deep in Nagomi, another town just a short drive from the TSMC plant, where about 40% of the town’s 9,000 residents are over 65. Last year, 188 residents died and just 44 babies were born.
Mayor Yoshiyuki Ishihara said he doesn’t expect much change in Japan even with the new leadership. “There are very few policies that leave an impression, and many of them don’t reach the regions directly,” he said. “I hope that policies will be implemented that will make the regions more prosperous.”
Few Japanese people living in small towns like Misato and Nagomi have any kind of investment in the markets, personal pensions, or M&A activity. The return of inflation has come as a shock to a population that has not experienced rising prices for 30 years. Imported staples like food and fuel have suddenly become more expensive, compounded by the weak yen.
During the election campaign, LDP presidential candidates have voiced concern about the soaring cost of living rather than touting the positive aspects of rising prices. Sanae Takaichi, whose popularity is on the rise, has called for increased income support for society’s most vulnerable. Shinjiro Koizumi, another leading candidate, has lamented the disappearance of the country’s economic leaders.
“To put it bluntly, Japan is in decline,” Koizumi said at an LDP presidential election debate in Tokyo earlier this month.
“The post-war period of rapid economic growth was driven by companies like Honda and Sony. They started in towns and went on to dominate the world. But in the past 30 years, we haven’t seen any companies like that,” he said.
Still, the Japanese public’s strong desire for stability limits the room for sudden policy changes, allowing the LDP to remain in power. Opposition parties have consistently struggled to present compelling alternatives to voters, and any attractive policy ideas they do come up with are often quickly co-opted by the LDP.
No Japanese politician has offered any quick fixes to deep-rooted structural problems like a declining population, said Kumano Hideo, a former Bank of Japan official and now an economist at Dai-ichi Life Research Institute. The TSMC factory in Kumamoto has had a positive impact on the local economy, but there are limits to how far it can go, he said.
“To really stimulate the domestic economy, we need similar economic effects across the country,” Kumano said. “And that’s a very big challenge.”
That’s an existential issue for places like Misato, one of 744 Japanese municipalities at risk of disappearing because of population decline. Kimio Motoyama, 71, chairman of the town’s chamber of commerce and a longtime LDP supporter, said he wants the next prime minister to ensure that small towns like Misato aren’t left behind. He expects benefits from the TSMC plant to reach his town, but he also wants more government support for agriculture.
“If the economy doesn’t improve, we can’t continue living here,” said Motoyama, who runs a small construction company. “Our way of thinking about business may be old-fashioned, but we are the people who have supported Japan for a long time.”
Most read articles on Bloomberg Businessweek
©2024 Bloomberg LP
