At the beginning of the 21st century, Japan has a very technologically advanced and mature industrialized economy. Even after a long period of sluggish and neg- ative growth in the 1990s, its economy is still the world's second largest and most technologically advanced one. While the prospect for long-term growth is assured, certain internal and external factors will impede or slow down its growth in the short run.
The external factors include the poor economic performance of the major trading partners of Japan. After about a decade of healthy growth, the American economy is entering a period of low growth and quite possibly decline and recession . With the exception of Taiwan, all other Asian Pacific countries are still suffering from the devastating blow of the 1997 financial crisis. Some of them, such as South Korea, are showing recovery, but their heavy foreign debt could easily prevent their full recovery and growth. As the major trading partners of Japan, the poor economic performance of these countries will damage the Japanese recovery and prolong its economic stagnation. External barriers also include the toughening competition among and between Japan, the United States, and the Asian Pacific countries over world markets, especially for motor vehicles and high-tech products like personal computers and semiconductors. More intensive competition will reduce Japan's share of these markets and negatively affect its economic recovery.
Internally, Japan will be faced with continued pressure to liberalize its economy and make it open to foreign competition. Economic liberalization carried out under the deregulation reforms has encouraged foreign investment in Japan, which is a positive stimulus to the economy in the short run. However, in the long run, extensive foreign competition will likely lead to downsizing, bankruptcies, and takeovers. The Japanese government has restricted much deregulation in the manufacturing sector, but it is not clear how long it can resist foreign pressure to do so, mainly from the United States and the European Union. Japan faces a dilemma here: its refusal to comply with their demands could lead to restrictions on Japanese exports to other markets, while its full compliance could damage its manufacturing industry.
Japan's aging population is another major long-term factor. Any future economic recovery will encourage spending by the Japanese, which will further contribute to the recovery, but an aging population has a lower demand for goods and services than a young one and tends to spend less and more cautiously even when the economy is booming. The gradual shrinkage of the domestic market will hamper Japan's economic growth in the short run, and could create major problems in the long run as Japanese enterprises face tough competition in foreign markets while suffering a decline in domestic demand.With an aging population, Japan will face a reduction in tax revenues and an increase in spending for health care and other components of the social safety net.
If the post-war history of Japan is of any indication, the Liberal Democratic Party will remain a leading political party in the foreseeable future. Though a reduction in its popularity has denied it a majority of parliamentary seats necessary for its forming governments on its own, it has proven quite capable of forging coalition governments and will likely remain a determining factor in future elections.