Policy failures after the Heisei bubble collapse pushed Japan into chronic deflation and long-term national decline.
Drawing on Tamura Hideo’s analysis, this text examines Japan’s shifting national power since the Meiji Restoration, China’s rapid ascent, and the urgency of breaking free from deflation to restore national strength.

However, due to policy failures after the collapse of the Heisei bubble, Japan fell into chronic deflation and its national power has continued to shrink.
2018-01-29.
The following is from a serialized column by Tamura Hideo published at the front of this month’s issue of the monthly magazine HANADA.
As readers know, I came to know of him only after August four years ago, but it is no exaggeration to say that he alone truly understands economics in Japan’s newspaper world and indeed in its broader commentary sphere.
All emphasis in the text other than headlines is mine.
2018 is an opportunity to escape deflation.
The greatest focus this year is whether Japan can break free from its long-standing affliction of chronic deflation.
By the end of last year, consumer prices, the supply-demand gap, and the effective job-offer ratio had shown a steady improvement since the latter half of the year, suggesting favorable conditions, yet what is concerning is that both the government and the Bank of Japan remain hesitant about achieving the price stability target of 2 percent inflation, allowing bureaucrats who think only in terms of policies that invite deflationary pressure to exploit the situation.
The Abe administration must reaffirm that overcoming deflation is the key to Japan’s revival, including in politics and national security, and should clearly indicate the path of an expanding economic cycle, putting both fiscal and monetary policy into full operation.
This year also marks the 150th anniversary of the Meiji Restoration.
Let us look back at how Japan’s national power has evolved compared with other major countries.
The late British economist Professor Angus Maddison estimated the historical trajectory of real GDP in terms of purchasing power.
If this is regarded as national power, Japan in 1870 after the Restoration possessed only 25 percent of Britain’s and 13 percent of China’s national power, merely a small Far Eastern economy, yet by 1930 it had surged to 48 percent and 43 percent respectively.
A national spirit that sought “clouds above the hill” propelled this rise in national power, enabling Japan to overcome the Sino-Japanese War, the Russo-Japanese War, and World War I, yet in 1940 Japan suffered a crushing defeat in the Pacific War against the United States, whose economic scale was nearly five times larger, losing half of its national power.
However, Japan achieved a miraculous postwar recovery, reaching 33 percent of U.S. national power, 169 percent of Britain’s, and 159 percent of China’s by 1970.
Yet due to policy failures following the collapse of the Heisei bubble, Japan fell into chronic deflation and its national power has continued to contract.
China, meanwhile, began to rise with its reform and opening policies starting in the late 1970s, overtook Japan in national power in 1985 as Japan entered its post-bubble decline, and by 2008 had surged to three times Japan’s level.
After absorbing massive dollar funds that had lost direction following the Lehman shock of September 2008 and achieving double-digit high growth, Xi Jinping, who became General Secretary in the autumn of 2012, shifted to an outward expansionist policy and has been striving to eliminate Japan’s influence in Asia.
If Japan’s decline continues, it will not take long for the Japan–China balance of national power to return to what it was at the time of the Meiji Restoration.
Sensing this, South Korea has effectively become a subordinate state of China, while North Korea, backed by China, now boasts of launching nuclear missile attacks against Japan.
To be continued.