By Fareed Zakaria, CNN
Wherever you are in the world, you've probably used or coveted some Japanese product - a Honda four-wheeler; a Toyota Prius, a Sony, a Panasonic TV, a Nikon camera. Since the 1950s, Japan's exports have flooded the world and fueled an economic miracle at home, making that country one of the wealthiest in the world. Well, this week marks a turning point - one of the world's great export engines has run out of gas.
What in the world is going on?
For the first time in 31 years, Japan has recorded a trade deficit. In simple terms, that means Japan imported more than it exported last year. Now this is not that unusual for some rich countries: the U.S. has had a trade deficit since 1975, and yet we've grown. But the U.S. economy is not built on exports. Japan's economic rise on the other hand, has been almost entirely powered by exports.
So what has changed in Japan?
The Japanese government would like to blame one-off events: Last year's earthquake and tsunami crippled factories and shut down nuclear energy reactors. The offshoot of that was decreased economic output, plus they needed to import expensive oil from the Middle East. But natural disasters have only highlighted and accelerated existing trends in Japan: A decline in competitiveness and an ageing work force.
China and other East Asian countries can now produce cheaper products and in greater quantities. Add to that a rising Yen, and Japan's exporters have been at a disadvantage globally. Toyota's chief perhaps said it best last year: "It doesn't make sense to manufacture in Japan."
Then add to this Japan's demographics. Between 1990 and 2007, Japan's working population dropped from 86 to 83 million. At the same time, the number of Americans between the ages of 15 and 64 rose from 160 million to 200 million. In a global marketplace, this is a major handicap for Tokyo.
Between 2001 and 2010, Japan's economy grew at seven-tenths of one percent - less than half the pace of America's. It was also well behind Europe. Contrast that with growth per person - or GDP per capita - and Japan actually outperforms America and the Euro Zone.
So while Japan's economy in aggregate has been hurt by this lack of workers, for the average Japanese worker income is still up and quality of life is still very high. That's partly why the country has not felt the pressure to reform.
Now it's easy to extrapolate from the data that Japan's low growth is not a failure of economic policy, but just a reflection of its demographics. But that's too simple. In reality, Japan's industry is becoming less competitive and even per capita incomes will start slowing down.
Tokyo's policymakers have failed its people - they could have opened up many of its closed sectors to competition, reformed its labor laws to make Japanese labor more attractive, cut pension benefits, and allowed more immigration. Its government could have put the country on a path to reduce its massive debt burden. Instead, we're now entering an era where one of the great manufacturing nations of history faces a looming current account deficit. With its debt at 211% of its GDP, if the cost of its borrowing increases, Tokyo would face an even greater crisis: A default.
Keeping a rich country competitive is very hard, especially in a democracy where interest groups keep asking for more - more benefits, more subsidies, more protections. They want to be shielded from competitive forces. It is happening in America, just as it happened in Japan. It's easy to forget how powerful a growth engine Japan was in the 1960s, 70s, and 80s.
But eventually, it was unable to change its ways, reform, and get less rigid. The result was decline.