NLI Research - The True Potential of the Japanese Economy
The NLI Research Institute has published an article titled "The potential growth rate can be changed: The true potential of the Japanese economy," authored by Taro Saito. The following is intended to reflect the essence of this work in English translation
1. The Stagnation Paradox: Challenging the Narrative of Inevitable Decline
Japan's post-pandemic economic recovery is a story of profound underperformance, a divergence from its global peers so stark it demands a fundamental re-evaluation of the nation's perceived economic limits. Correctly diagnosing the root cause of this sluggish growth is of paramount strategic importance; a misdiagnosis leads to ineffective, and potentially counterproductive, policy solutions.
The divergence in performance is stark. A comparison of real GDP, benchmarked against 2019 pre-pandemic averages, reveals that Japan's economy has expanded by a mere 2.1%. In contrast, the United States has surged ahead by 14.7%, and the Eurozone has grown by 6.1%. On an annualized basis over the past five years, Japan’s growth rate of 0.4% is dwarfed by the U.S. rate of 2.5% and the Eurozone's 1.1%.
The conventional explanation for this persistent underperformance points to a structural ceiling: a very low potential growth rate. Official estimates, such as the OECD’s 2025 forecast of just 0.17% for Japan, appear to validate this narrative of inevitable decline. This view suggests that Japan is fundamentally constrained by its supply-side capacity and that ambitious growth targets are unrealistic.
This analysis posits a more dynamic and optimistic diagnosis: Japan's potential growth rate is not a fixed, structural barrier but a dynamic estimate that is heavily influenced by the trajectory of actual, demand-driven GDP. This paper argues that Japan's economic fate is not predetermined by demographic and supply-side constraints alone. Decades of anemic demand have created a self-fulfilling prophecy, artificially suppressing the nation’s measured potential. To chart a new course, one must first deconstruct the very concept of the potential growth rate itself.
