Japan's economy in deep trouble? Look again.

One of those strengths is the huge piles of cash and bonds that the country built up over decades of blistering growth and giant trade surpluses: more than $1 trillion in foreign exchange reserves (mostly US Treasury bonds), $1.4 trillion (about the size of Russia’s economy) in the Government Pension Investment Fund reserves, and $1.5 trillion (about the size of Canada’s economy) in household savings.

In order to fund its spending, the state has essentially borrowed against these funds, and from companies and financial institutions that buy government bonds. Martin Schulz, senior economist at the Fujitsu Research Institute in Tokyo, describes this as a form of “deferred taxation” that will eventually have to be paid back by the Japanese people.

Japan's big strength

The biggest strength of the economy, however, and the source of this accumulated wealth, remain the nation’s companies. Having survived the global slowdown, they recently recorded their fifth straight quarter of collective profit rises. Wages also grew in 2010 – albeit for the first time in four years - unemployment had dipped back below 4.9 percent by the end of the year, while overall corporate earnings are projected to grow 31.5 percent in the fiscal year to March.

Unlike the government, a large portion of Japan’s big corporations are debt-free, and not a few of them have large war-chests with which they intend to take advantage of the current strength of the yen by acquiring overseas assets. Canon, for example, recently earmarked a trillion yen ($12.25 billion) for overseas takeovers over the next few years.

Canon is also just one Japanese company posting record sales to fast-growing Asia, with many firms now making more money there than in their domestic market.

Under the radar

It’s not only Japan’s famous global brands that are flourishing, but numerous others that are largely under the radar. A case in point is Murata, a maker of specialist components that go inside smartphones. Although few know its name, it commands a 50 percent share of the global market of some of these parts, and recently announced profits that were up 270 percent in the nine months to December. In addition to the likes of Nintendo and Nissan, it’s these companies that enable Japan to run a huge trade and current account surplus, even with the yen at around 80 to the dollar.

This is not to ignore Japan’s serious structural issues, including its shrinking population, which is its “single biggest problem,” according to Takashi Shiono, economist at Credit Suisse in Tokyo. Much of Western Europe, along with South Korea, is facing a similar situation; while the legacy of the one-child policy will soon begin to make China’s demographics even more skewed.

Despite the shrinking population and accompanying deflation, Japan has managed to nudge productivity and growth upward. To kick-start the domestic market, though, unprofitable "zombie companies" would have to be allowed to fail, suggests Mr. Shiono, something that would cause unemployment and break the “social consensus.”

For all its problems, Japan’s profitability, high employment, and competitiveness should still make it the envy of much of the West, not an object of scorn or pity. As Ichigo’s Mr. Callon puts it, “Pound for pound, is Japan is punching well above its weight.”

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