Japan, Asia’s second-largest economy, has long been known as the land of the rising sun and a global leader in technology and innovation. Brands like Toyota and Mitsubishi are household names, symbolizing Japan’s significant contributions to the world. Japan’s economy has consistently outpaced most other Asian countries, except for China. However, this dominance may soon change. In the coming years, India is expected to surpass Japan, and Indonesia is also on track to overtake Japan, potentially becoming the third-largest economy in Asia.
As of 2023, Japan’s GDP was estimated by the International Monetary Fund (IMF) at $4.21 trillion, while Indonesia’s GDP stood at $1.37 trillion. By 2045, many analysts, including President Joko Widodo, project that Indonesia will become the fourth-largest economy globally, trailing only India, China, and the United States. These projections estimate that Indonesia’s GDP could reach over $9.1 trillion, surpassing Japan’s economy, which is expected to struggle with an aging population and economic stagnation.
So, how will Indonesia achieve this? The answer lies in its large and growing population. Indonesia is one of the world’s most populous countries, which provides a massive potential market for goods and services. A larger population can drive domestic demand and attract investments from both local and international sources. By 2045, Indonesia’s population is expected to exceed 309 million, while Japan’s population is projected to decline from 123 million to just 108 million. Indonesia’s human capital alone positions it for significant economic growth, but challenges remain.
To reach its economic goals, Indonesia needs to maintain an average growth rate of 5 to 6 percent annually. However, sustaining this growth has proven difficult due to both global and domestic challenges. Since 2010, Indonesia’s annual growth has hovered around 5 percent, but events like the Covid-19 pandemic in 2020 caused the economy to contract by 2.1 percent, setting back progress. Additionally, Indonesia now faces higher levels of debt, inflation, and rising interest rates, which pose further challenges.
Indonesia’s government debt to GDP ratio was 30.6 percent in 2019 but increased to 38.71 percent by mid-2024. While this is still relatively low compared to other Asian economies, rising government debt can limit future economic growth by reducing the government’s ability to invest in critical areas like infrastructure, education, and healthcare. High levels of debt mean that more of the government’s budget must go toward servicing existing debt rather than promoting economic growth.
Moreover, Indonesia’s state-owned enterprises (SOEs) have also accumulated significant debt. These companies, owned by the government, play a crucial role in the economy, and their financial health is closely tied to the country’s broader fiscal stability. Since Joko Widodo became president, Indonesia’s fiscal situation has been stable, but the debt levels of SOEs have increased. One of Widodo’s major initiatives was infrastructure development, which required substantial funding. Some of this funding came directly from government revenue, while some SOEs borrowed money to finance these projects.
For example, Kereta Api Indonesia (KAI), the state-owned railway company, has been instrumental in developing new systems like the Greater Jakarta Light Rail Transit (LRT) and the high-speed rail line between Jakarta and Bandung, backed by China. The high-speed rail project was initially estimated to cost $6 billion but grew to over $7.2 billion due to cost overruns. To cover these costs, KAI borrowed $543 million from the China Development Bank. This new debt, denominated in foreign currency, increases KAI’s financial obligations and raises concerns about the project’s long-term sustainability. The Indonesian government has also guaranteed this debt, transferring much of the financial risk to the state.
In April 2024, local news reported that KAI requested financial support from the government to manage the debt incurred during the high-speed rail project. This situation highlights the broader debt challenges Indonesia faces, which, if left unaddressed, could hinder the country’s long-term economic growth.
Despite these debt issues, Indonesia’s large population provides a strong foundation for economic growth, and the country is still on track to surpass Japan. Another factor contributing to Indonesia’s rise is the government’s efforts under Joko Widodo’s leadership. The government has implemented various reforms in infrastructure development and is also focusing on investments in education, healthcare, social services, and more.
Indonesia’s vision for 2045 is built on four key pillars. The first pillar aims to achieve top rankings in Global Food Security and Global Biopharmaceutical Resilience, ensuring health resilience and self-sufficient food security systems. The second pillar focuses on fostering high-value industries, enhancing financial services, and promoting sustainable tourism. The third pillar is about building a more inclusive and equitable society by improving education, increasing life expectancy, and reducing child mortality. Finally, the fourth pillar seeks to increase the renewable energy mix and make Indonesia a leading carbon credit issuer.
These ambitious goals depend heavily on the government’s competence and integrity. However, the recent rise of Joko Widodo’s son, Gibran Rakabuming Raka, as Indonesia’s vice president raises concerns about political dynasties. Concentrating power within a single family can undermine democratic processes and lead to governance driven more by loyalty than merit. Gibran’s experience and capability to handle the challenges of high office remain in question, but his leadership could either continue his father’s legacy or pose new risks to Indonesia’s future.