Japan's Economic Puzzle

In examining the economic landscape of Japan through a conventional lens, one might conclude that its performance is lackluster, particularly when compared to other advanced economies like the United States and Germany. This perspective is informed by observations of Japan's slow GDP and productivity growth rates. However, looking at the Japanese economy through the lens of economic complexity reveals a different narrative. Japan stands out as possessing the most complex economy globally – a position it has maintained since 1981 – thanks to its highly sophisticated export portfolio. Its high complexity suggests that there must be something else to the story of Japan's economic performance that typical indicators are not able to capture. Japan faces significant and well-known structural challenges, including an aging population, a stagnated labor force, and consequently, a rapidly increasing age dependency ratio. These challenges are likely contributors to Japan's economic slowdown, as they have direct implications for costs. However, Japan's high level of economic complexity suggests that it has accumulated substantial "know-how," enabling it to remain a leading exporter of sophisticated goods, despite a decline in the competitiveness of its goods' exports (as measured by global market shares). It would make sense that for Japanese firms and agents to thrive under these circumstances, they would choose to redeploy that know-how—along with investment—in other economies. This would result in a significant shift in profit generation into global economic activities outside of Japan. This paper investigates this hypothesis by looking at the trends regarding Japan’s global economic footprint over the past decades.