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New shoots suggest Japan is ready for blossom season

David Cameron is due to visit Japan next week and will meet his counterpart, Japanese PM Yoshihiko Noda. This is an important opportunity for British policymakers to reassess what’s happening in the world’s third-largest economy.

For years now, perceptions of Japan have been dominated by the twin disasters of its post-bubble economic stagnation (the so-called ‘lost decade’ after 1990) and the crushing 1995 Kobe and 2011 Great East Japan earthquakes. Whereas in the 1980s bookshops were full of textbooks on the Japanese post-war economic miracle, today their shelves groan under the weight of tomes on China’s rise, and little if anything can be found on contemporary Japan.

It’s not difficult to write up Japan’s problems. Its government debt:GDP ratio exceeds 200 per cent, after years of attempts to pump-prime economic growth. Its real growth rate has been trending down since the end of the 1980s, and the yen has appreciated by close to 20 per cent against the dollar in recent years, making its exports less competitive. Its population is falling rapidly and it faces a sharp decline in its working-age population in particular. Last year’s earthquake caused massive damage, effectively shutting down its nuclear power generation, wiping out businesses and infrastructure in the east of the country, and disrupting supply chains everywhere else.

Yet while a cold winter has delayed this year’s cherry blossom season in Japan, there are definite signs of spring in its economy. The OECD forecasts that Japan will register the strongest growth of the G7 economies in the first quarter of 2012, as activity bounces back from last year’s earthquake. Retail sales are up strongly and the Nikkei has been posting solid gains. Unemployment is down to 4.5 per cent (in contrast to the eurozone, where unemployment has now reached 10.8 per cent). Corporate earnings are rising and the yen has pegged back following the announcement in February by the Bank of Japan of a higher (1 per cent) inflation target and fresh monetary easing.

These may just be green shoots. But as Will Hutton rightly pointed out in yesterday’s Observer, Japan has deep and extensive economic strengths on which to build. It remains an industrial powerhouse, with global-beating companies like Toyota, Hitachi, Panasonic and Sony proving that the legacy of Japan’s post-war ‘iron triangle’ of business–state cooperation on economic policy and industrial strategy has not been lost. It has a superb transport infrastructure, with a high-speed rail network that now spans the length and breadth of the country, and it is also highly competitive in new sectors, like the gaming, film and other cultural industries that service its booming youth cultures.

Indeed, Japan is also a hugely innovative country, filing 20 per cent of the world’s applications for patents in 2011, second only to the US. Japanese companies accounted for 12 of the top 30 corporations filing patents in the world last year. One consequence of this is that it has a current account balance with China, which now makes up 21 per cent of its trade share, up from 5 per cent in 1995.

Big challenges remain, not least to craft energy, immigration and childcare policies that can rise to the formidable tasks of equipping the country to cope with its rapid aging and energy supply problems. But twice in the last 150 years Japan has shown that it is capable of profound strategic national renewal – first, after the Meiji restoration in 1868, and then once again as it recovered from defeat in the second world war. It is quite possible it will do the same again in the 21st century.

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