This article first appeared in Forum, The Edge Malaysia Weekly on March 18, 2024 - March 24, 2024

In recent days, news has emerged that Japan has lost its coveted position as the world’s third-largest economy to Germany. The decline has been widely attributed to the yen’s steep fall against the dollar over the past two years. However, some analysts are less sanguine, critiquing the nation’s lack of structural reforms, such as high non-tariff barriers and weak female participation in the labour force, at least relative to other major economies.

Indeed, Japan’s reluctance to revamp its industrial organisation more vigorously is believed to have prolonged its stagnation since the bursting of the asset bubble in the 1990s. To a large extent, this has allowed other hungrier economies, especially those with a huge, young population, to overtake Japan. China usurped Japan’s position in 2010, and according to the International Monetary Fund, India is poised to do the same in the near future.

What, if any, are the green shoots for the Japanese economy then? First and foremost, the Japanese stock market has seemingly shrugged off pessimism surrounding the economy’s slip to the fourth spot, surpassing a level last seen 34 years ago when the country was at the peak of its ascendancy. While it is too early to declare that “Japan is back”, the surge in interest is underpinned by several factors including an improvement in corporate governance, favourable asset valuation due to the yen’s depreciation, and fund managers reallocating investment from the decelerating Chinese market to Japan.

In any case, the key to a sustained bull run is whether money will be able to circulate to the smaller companies on the stock exchange, in addition to the broader Japanese industrial ecosystem. It is also crucial that Japanese policymakers leverage this momentum to push bolder reforms. Some noteworthy recent measures include moves by major companies to raise employee compensation, which has witnessed years of slow growth, as well as the liberalisation of taxi and bus licences to non-Japanese speakers, once deemed unimaginable by more conservative quarters.

Second, and perhaps more importantly to Southeast Asia, how do such shifts inform regional development? Recent trends indicate that environmental sustainability ranks among the foremost priorities for virtually all Southeast Asian economies. To this end, the looming transition to a low-carbon economy stands to widen economic disparities between nations unless swift, decisive action is taken.

This is where Japan and Southeast Asia can collaborate. An oft-cited example is the production of electric vehicles (EVs). Most energy analysts would point out that Japanese automakers, despite their preponderance in the market for internal combustion engine vehicles, have been undercut by more aggressive counterparts from other major economies in the manufacture and sales of EVs. Indeed, Thai Prime Minister Srettha Thavisin recently warned Japanese automakers that they could be left further behind unless they quickly transition to producing more EVs. There is a subtext to his message: Srettha was pushing for more technology cooperation between the Japanese automakers and Thai suppliers. In its inimitable understated style, the Japanese leadership seemingly responded to this call during last December’s Asean-Japan Commemorative Summit. Japan has promised to curate a master plan to foster a competitive and green automotive industry with its Southeast Asian counterparts, in addition to a series of implementation plans in other domains.

The crux of the matter is that introducing path-breaking technologies presents challenges that even the most advanced nations like Japan cannot solve on their own. Therefore, closer cooperation and perhaps “co-creation” with developing nations — especially those within Southeast Asia — warrants more serious consideration. In addition, environmental sustainability is no longer a choice but a necessity to maintain a competitive edge in the global economy. It is far better to adjust to these new dynamics of structural transformation by proactively working with like-minded partners. Effective execution on this and related matters is likely to generate a rising tide lifting all boats.

Guanie Lim is assistant professor at the National Graduate Institute for Policy Studies, Japan. Muhammad Ali Imran Ya’akub is an independent political analyst in Malaysia.

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