Japan's Global Competitiveness Ranking Falls to 38th (out of 67 countries and regions)

The country's booming stock market seems at odds with its long-term prospects, which are considered shockingly weak for a country that once topped IMD Business School's annual survey.

Dec 27, 2024

Japan struggles to keep up with the rest of the world in the IMD Business School's World Competitiveness survey (AI generated original image sourced from author Mark Kennedy)

What’s new: In the World Competitiveness Ranking 2024 published by the Institute for Management Development (IMD) Business School in Switzerland, Japan has fallen from 1st to 38th place. Out of 67 countries and regions in the world, Japan's ranking dropped from 35th last year to 38th, continuing its long-term decline. From 1989, when the rankings began, to 1992, Japan ranked first in the world.

Why it matters: The World Competitiveness Ranking 2024 assesses how economies are optimizing their capabilities for long-term value creation. It benchmarks countries' economic performance, identifies areas for improvement, informs policy decisions, and attracts investment by highlighting strengths and weaknesses. This comprehensive ranking is based on both hard data and expert opinions from business leaders and government officials.

Go deeper: A low score in the World Competitiveness Ranking signals potential economic weaknesses, including low productivity, inefficient infrastructure, and an unfriendly business environment. This can discourage investment, hinder economic growth, and limit a country's ability to compete globally, potentially affecting the living standards of its citizens.

"(For Japan), the root of the problem is that senior managers have little international experience and are unable to respond flexibly to changes in the global economy. As a result, Japan has been left behind in major changes such as the IT revolution.” - Yukio Noguchi, renowned Japanese economist

To get a better sense of why Japan seems to be failing in several categories, it is best to dive into the data.

By the numbers: The IMD rankings use 336 indicators to assess four competitiveness factors, including economic performance, government efficiency, business efficiency, and infrastructure.

Some encouraging news: Japan scores relatively high in economic performance (21st) and infrastructure (23rd). In terms of overall "attractiveness," Japan ranks 23rd in the world. This includes factors such as cost of living, brain drain, quality of life, foreign skilled labor, and personal income tax.
Room for improvement: The problem is that Japan ranks relatively low in government efficiency (42nd) and business efficiency (51st). In particular, management practices within the business efficiency category ranked very low (65th). Other below-average scores included human capital (49th), knowledge and regulatory framework (50th), and technology and business agility (56th) in the general category of future readiness. In all of these categories, Japan's ranking has declined over time.
Key questions: Management practices are evaluated on 14 items, such as "Is the company agile?" and "Does the company respond extremely sensitively to changing market conditions?" Japan's low competitiveness is due to its low scores on these items. The situation was the same in 2023.
Inadequate educational preparation: In terms of "preparedness," Japan ranks 58th. This includes components such as labor force growth rate, subject matter experts (SMEs), financial skills, international experience, managerial skills, primary and secondary education, science and technology personnel, university education, management education, and language skills.
Human talent development is lacking: Japan ranks 36th in human resource investment and development. This includes public spending on education, the number of teachers, vocational training, the proportion of women in the workforce, and health infrastructure.
Abysmal rating for international experience: Japan is literally the worst in the world (among the countries included in the survey). Related categories include managerial skills (62nd) and language skills (60th). Especially with the recent devaluation of the yen against the U.S. dollar, Japan is sending fewer and fewer students abroad. The total number is now about one-fourth that of its much smaller neighbor, South Korea.
Results: These low scores shed light on why Japan has been largely unable to respond to major changes such as the IT revolution, the development of a global horizontal division of labor, and the shift to fabless manufacturing.

Even after decades of trying to improve basic English language skills, Japanese businesspeople often struggle to communicate with international business partners (AI generated original image sourced from author Mark Kennedy)

Context: Japan has become a country with a very low birth rate and an aging population. The number of births has been on a downward trend since the Baby Boom. Furthermore, since 2016, fewer than 1 million babies have been born in the country each year.

According to the Ministry of Health, Labor and Welfare, the most recent number of births last year was only 727,000, the lowest on record. Although the number of births has declined for eight consecutive years, the number of births in 2024 is expected to decline even further, falling below 700,000.

For many Japanese households, having children is simply an economic impossibility. According to the Ministry of Internal Affairs and Communications' "Household Survey (households of two or more people) for October 2024," the average actual monthly income of working households was 580,675 yen (about US$3,675) per household. This is a real increase of 1.1% compared to the same month last year. On the other hand, the average consumption expenditure was 305,819 yen (US$1,940).

Looking at how the average household spends its budget, food expenditure accounts for a large share at 89,730 yen ($570). Non-consumption expenditure (taxes, social security contributions, etc.) for working households with two or more persons is 96,075 yen ($610).

Middle-income working households are barely scraping by.

"About 300,000 yen ($1,900) or more goes out in expenses each month. What's left is 100,000 yen ($630) to 200,000 yen ($1,260), but I want to save money for my children's education. When I looked it up online, estimates indicate that I should save 10 million yen ($63,350).” - 31-year-old "Mr. Tanaka" (pseudonym)

Mr. Tanaka's plight is typical of a young family in Japan. He earns 350,000 yen ($2,200) a month and takes home 280,000 yen ($1,800) after taxes. His wife earns 250,000 yen ($1,600) a month and takes home about 200,000 yen ($1,300). Together, they have nearly 480,000 yen ($3,000) a month to spend as they please. Their only assets are cash, and they have a total of about 2 million yen ($13,000) in the bank.

They live in a 1LDK1, 3rd-story walk-up apartment in Tokyo that costs 100,000 yen ($630) per month. Their monthly food budget is 80,000 yen ($510), which is also average. Although their income and expenses seem to be such that they can set aside a certain amount for savings, they say that their household finances are tight.

Once their new baby is born, the Tanakas' kitchen table will probably look like this (AI generated original image sourced from author Mark Kennedy)

In fact, this family's budget is about to be stretched even further. The Tanakas are expecting a baby next year. Mrs. Tanaka is currently three months pregnant and works from home, but in a few months, she will go on maternity leave. It was the couple's unanimous decision that Mrs. Tanaka would not go back to work (outside the home) until their child started kindergarten. Instead, she would focus on raising their child.

"My wife's income will practically disappear, so I'll have to get by on my own salary of 280,000 yen ($1,800). I'm in a hurry to save as much as I can while I can. I want to send my child to college. First, I want to send him to cram school2. We don't have any extra money. We don't want to think that our salary will be the same in the future, but even if we just look at the fees for cram schools, we can see that they are going to be a huge burden.” - Mr. Tanaka

The cost of cram schools has increased over the years. In 1994, after the collapse of the bubble economy, the average annual cost of cram schools for junior high school students was 145,540 yen ($925), but by 2000 it had risen to 162,357 yen ($1,030). By 2018, the cost had risen to 202,965 yen ($1,300), an increase of about 30% in just over a quarter of a century.

While not as high as junior high school, high school tuition has increased by about 30,000 yen ($200), from 74,202 yen ($475) in 1994 to 106,884 yen ($675) in 2018.

At this pace the Tanakas are unlikely to be able to keep up with the steady rise in the cost of just about everything in Japan.

Yes, but: If the rankings show the true state of Japan, then it is not rational to invest in Japanese companies. However, at the beginning of this year, when the Nikkei average was approaching its bubble-era high, it was said that "the time is coming to invest in Japanese stocks." This view is clearly at odds with the image of Japan in these rankings.

In addition, to be fair, purchasing power parity (PPP) must be taken into account. As a result, the situation in Japan may not be as dire as some of the comparative statistics suggest. As Noah Smith recently pointed out in "Yes, Americans Are Much Richer than Japanese People: GDP is not a perfect guide to wealth, but it's pretty darn good" PPP levels between the two countries tend to be closer than GDP per capita comparisons. That said, Japan still lags far behind the US in terms of PPP.

Commentary: While I had three relatively long "tours of duty" at my old company's headquarters in Chicago along the way, I have made Japan my home since finishing a year of graduate school in Japan in 1991. My tenure in Japan, first as a student, then as a full-time businessman, and now as a semi-retired permanent resident, spans from when the country was ranked #1 in the World Competitiveness Ranking until the present. I literally lived through Japan's long period of the so-called "Lost Decades," which refers to a 30-year span of prolonged economic stagnation beginning in the early 1990s, characterized by slow growth, deflation, and falling asset prices. Triggered by the bursting of a massive economic bubble, the crisis led to a banking crisis, a credit crunch, and a deflationary spiral that hindered economic recovery. Structural problems such as an aging population and declining productivity exacerbated the situation and had a significant impact on Japan's economy and society.

You might think that someone with such a background would be sour on Japan and, therefore, not in the right frame of mind to decide to become a permanent resident of the country. Well, you would be wrong.

While the rankings paint a clear picture of the overall situation in Japan, and the financial statistics measured by Japan's various government agencies highlight some serious economic pain that the Tanaka family and others like them are experiencing in real time, as Noah Smith points out, Japan still excels in several key performance indicators that are often difficult to quantify.

Still, the IMD report should be seen as a loud and clear wake-up call for the country. However, I worry that it will fall on deaf ears, especially because Japan's gerontocracy that controls the government seems so out of touch with reality on the ground. There are, of course, a few individual politicians who are fully on board with efforts to reverse the trends highlighted in the Global Competitive Rankings, but in the immortal words of Mahatma Gandhi, "The dissenter is always a minority of one.”

Even as resident foreigners without voting rights, people like me and others who love the country must do all we can to encourage the younger generations of Japan to have the courage to do something about this disturbing situation. They can't just sit back and moan, "Sho ga nai (しょうがない)," which means, "It can't be helped.” This kind of apathetic, defeatist attitude will only cause Japan to slip further down the rankings. It sounds easier said than done, of course, but simply by participating in the political process, much change should be possible. It is time for a real and meaningful "setai kotai" (世帯交代), which in Japanese means "generational change.”

The cultural reluctance to make fundamental changes in the absence of an acute crisis, and the tendency to make only small, incremental adjustments, must be examined with brutal honesty. While there is no need to throw out everything traditional - especially in a country with such a long history and proven management disciplines such as kaizen (改善) or continuous improvement - something must give.

What’s next: Japan's declining competitiveness in the Global Competitiveness Ranking reflects challenges such as economic stagnation, technological lag, red tape, and a shrinking workforce. To improve its standing, Japan must implement economic reforms, embrace digital transformation, address demographic challenges, and increase international engagement.

While it will take many reforms across a wide range of sectors, Japan should be able to improve its ranking in the World Competitiveness Ranking survey conducted by IMD Business School (AI generated original image sourced from author Mark Kennedy)

What do you think? Are you bullish or bearish on Japan's future? Do you have any ideas about how the country could improve? If so, please add them in the comments.

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