Brazil's opponent, Japan faces an off-field challenge: a 30-year economic enigma

Selection's Opponent: Japan draws with Sweden and faces Brazil in the second phase After defeating Scotland in the group stage, the Brazilian national team will face, this Monday (29), an opponent that generates interest not only on the field. Japan enters the second phase of the 2026 World Cup carrying one of the most studied cases in the global economy. As the fourth-largest economy on the planet, the country remains among the global leaders in innovation and high-tech manufacturing. At the same time, it has lived for decades with modest economic growth and structural challenges that limit faster expansion. (understand more below) 🗒️ Have a story suggestion? Send it to g1 Jacob Funk Kirkegaard, a researcher at the Peterson Institute for International Economics (PIIE), explains that this scenario began to take shape after the bursting of the real estate and stock market bubbles between the mid-1980s and early 1990s. From then on, Japan entered a long period of low growth and very low inflation — at times, even generalized price drops, a phenomenon known as deflation. At the same time, low birth rates, a shrinking working-age population, and rapid aging began to put pressure on the labor market and public finances. 📉 This set of factors became known among economists as "Japanification," a term used to describe economies that live with weak growth, persistently low inflation, and difficulty recovering momentum for long periods. More than three decades later, however, part of this picture has begun to change. Inflation has returned closer to the Bank of Japan's (BoJ) target, allowing the monetary authority to abandon its negative interest rate policy. Today, the benchmark rate is at 1% per year. "For the first time since population aging accelerated in the early 1990s, Japan may have a plausible path to developing sustained, domestically driven wage and price pressures," says Kirkegaard. Kazuo Ueda, Governor of the Bank of Japan (BoJ), attends a press conference following a monetary policy meeting in Tokyo, Japan, on January 23, 2026. REUTERS/Kim Kyung-Hoon Economic puzzle The recent improvement, however, has not eliminated the characteristics that make the Japanese economy a unique case. The country maintains one of the lowest unemployment rates in the world — reaching 2.5% in April — and has an estimated GDP per capita of around US$ 35,700 according to the International Monetary Fund (IMF). It also remains among the most innovative economies on the planet: according to the 2025 Global Innovation Index by the World Intellectual Property Organization (WIPO), it ranks 12th and leads indicators related to industrial sophistication and university-industry collaboration. In 2023, it allocated 3.44% of its Gross Domestic Product (GDP) — about US$ 145 billion — to research and development. Even so, its economy has grown by an average of only 1% per year for about three decades. It is this combination that researchers at Harvard University's Center for International Development define as an "economic puzzle." Despite modest growth, Japan has led the Economic Complexity Index since 1981, reflecting its ability to produce high-value-added goods. "Japan's economic history is not just about stagnation. It is also the story of an economy that redirected its productive knowledge beyond its borders," the researchers summarize. Demographics and the growth brake However, part of this "puzzle" involves the country's demographic transformation. The Organization for Economic Cooperation and Development (OECD) estimates that in 2026, nearly 30% of Japanese people are over 65 years old, while the fertility rate remains close to 1.2 children per woman. 👉 With fewer people of working age, the economy's growth potential diminishes, and pressures on public spending increase, especially regarding pensions and healthcare. And perhaps few indicators better translate this challenge than Japanese public debt. Even on a path of gradual decline, the IMF projects it will remain above 200% of GDP in 2026, one of the highest ratios in the world. People walk through a commercial district in Tokyo, Japan, on June 16, 2026. REUTERS/Kim Kyung-Hoon Part of this trajectory reflects the choices made by the country to cope with an aging population. Instead of pursuing a more intense fiscal adjustment or significantly raising the tax burden, the government began funding a growing share of pension and healthcare expenses through the issuance of debt. Aging has led many Japanese companies to change their growth strategy: with a domestic market that is increasingly smaller and older, they expanded investments abroad and began generating growing revenues from intellectual property, research and development, and dividends from international subsidiaries. The effects of demographic change also appear in the labor market. IMF data show that the service sector accounts for about 70% of the value added by the Japanese economy and concentrates some of the greatest hiring difficulties. In addition, workers over 60 are increasingly present in activities such as services and construction. This scenario helps explain why productivity gains vary across different sectors of the economy. ⚙️ While manufacturing has advanced in recent decades with innovation and improvements in production organization, domestic-oriented services — such as healthcare, retail, hotels, and food services — have recorded slower evolution. Despite this, economist Kyoji Fukao, a professor at Hitotsubashi University, states that this difference is not recent. In a study on the structural causes of Japan's so-called "two lost decades," he argues that the productivity gains achieved by manufacturing were not replicated in much of the service sector, where more efficient management models took longer to be adopted. "Productivity growth remained slow in Japan, as the most productive large firms did not expand their market share. Furthermore, job security takes priority in Japan, and as a result, the costs of opening and closing establishments are high," he states.