Sunday, January 08, 2006

Japan Surpassed by Rest of Asia

For long Japan have been the dominant economic powerhouse in Asia, with its economy being a multiple of the rest of Asia at current exchange rates. Adjusted for differences in purchasing power, Japan have however for some time been smaller than the rest of Asia. Indeed China alone have for the last few years been larger than Japan in purchasing power adjusted terms. However, while purchasing power adjusted figures are the most relevant when measuring living standards, GDP at current exchange rates is the most relevant measure when it comes to economic power since that is what counts in international dealings.

But now after the 16.8% upward revision of China's GDP and the continuing higher growth rate in Asia in general and China in particular relative to Japan as well as the relative fall in the yen's real exchange rate, the rest of Asia have now surpassed Japan in GDP at current exchange rates.

This trend of higher GDP growth in the rest of Asia relative to Japan is likely to continue for three reasons: 1) Japan have a much higher initial per capita income than the rest of Asia and other things being equal, a lower per capita income is usually associated with higher growth 2) Japan's population have already started to shrink and is far older than the rest of Asia and its working age population is set to decline significantly during the next decade. Even if the average retirement age is increased, this means that the potentail growth is lower than the rest of Asia, where birth rates declined much later than in Japan. 3) Japan have a much higher burden from the welfare state than other Asian countries and a far higher budget deficit and government debt. While the burden of government spending is low compared to Western Europe, it is much higher than in most other Asian countries.


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