Economy and Trade
Japan is the world’s third-largest economy, after the United States and China, and one of its most technologically advanced. A world leader in cars, electronics, and other technologies, it is heavily dependent on manufactured exports, and imported fuel and raw materials. Economic growth averaged 10% in the 1960s, 5% in the 1970s, and 4% in the 1980s. However growth stalled after its stock-market and property bubbles burst in 1989. During the “lost decade” that followed, the authorities’ mishandled the country’s economic malaise, and companies were slow to cut costs. Between 2002 and 2007, the economy rebounded, as surging global demand for cars and other consumer goods strengthened the country’s manufacturing sector. However, this expansionary period ended in October 2007, with Japan entering recession in 2008, and 2009 marking a return to near 0% interest rates. Japan’s huge government debt, equivalent to 170% of GDP, and its ageing population are two of the country’s biggest long-term problems.
Economic Policy over 12 Months
The government of former prime minister, Junichiro Koizumi, in 2006 set itself the target of getting Japan’s budget into surplus by 2011. In order to achieve this, it and successor governments introduced budgetary caps, with a view to reining in spending on public works and social welfare.
However, the policy of fiscal belt-tightening, also pursued by Koizumi’s successor, Shinzo Abe, was effectively overturned in December 2008 by the government of Taro Aso. Aso, who became prime minister in September 2008, declared that his government’s top priority was not balancing the budget, but insulating the economy and jobs from the escalating economic crisis.
Aso has struggled to get his stimulus packages through the Diet (Japan’s parliament). He has been hampered by Japan’s massive public debts—a legacy of Japan’s efforts to spend its way out of the 1990s recession—and by the blocking tactics of opposition parties, led the Democratic Party of Japan, which controls the Upper House. Confidence in his government suffered when his finance minister, Shoichi Nakagawa, was forced to resign after appearing to be intoxicated at a February 2009 G7 meeting in Rome.
The government finally succeeded in getting parts of its second stimulus package—a US$230bn ensemble that included controversial cash handouts to Japanese households—enacted by the Diet in early March 2009. The government secured approval despite a boycott by leading members of the ruling Liberal Democratic Party, including the popular former prime minister, Koizumi. The package also includes loans for unemployed workers, and further support for ailing banks.
Japanese interest rates were effectively held at zero from 2001 to 2006. The Bank of Japan, the central bank, reintroduced zero interest rates in December 2008, or, more accurately, it cut rates to 0.1%, and the bank’s policy committee has since kept rates unchanged. The Bank of Japan has also introduced emergency measures to boost liquidity, in the hope of persuading Japanese banks to resume lending. Leading business organizations have been calling for the government to prop up the stock market, and hence bank capital ratios, by using public funds to buy stocks.
An election which must be called by September 2009 is expected to be won by the opposition Democratic Party of Japan.
Economic Performance over 12 Months
While Japan’s banks have escaped the worst of the financial crisis, its manufacturers have been less fortunate. Locally-based multinationals, including Canon, NEC, Nissan, Panasonic, Sony, and Toyota, have all suffered a “triple whammy.”
The global slump has hit demand for cars, electronics, and other manufactured goods; the strength of the yen has hampered their price competitiveness, and their focus on the premium end of the market has rendered them unusually vulnerable to the global downturn in demand. Most manufacturers have seen massive falls in earnings, been forced to reduce output, and slash domestic jobs.
Exports fell by nearly 46% in January 2009, compared with a year earlier, causing Japan’s trade deficit to swell to ¥952.6 billion (US$9.7bn), the largest since records began. Unemployment climbed to 4.4% in December from 3.9%, with more than 340,000 additional Japanese joining the dole queue during December.
GDP fell at the annualized rate of 12.7% in the October–December quarter of 2008, the severest slowdown Japan has experienced since the 1974 oil shock.
“We are facing the biggest economic crisis since the second world war,” said finance minister, Kaoru Yosano, in February 2009. In a statement during the same month, the Bank of Japan said: “Economic conditions have deteriorated significantly, and are likely to continue deteriorating for the time being.”
Graham Turner, principal at London-based GFC Economics, believes the country has proved vulnerable because of too much exposure to emerging markets, overdependence on capital goods, and overreliance on discretionary consumer products. “Japanese industry [is] more exposed than any other major industrialized economy,” he said in February 2009. There is a growing view that Japan will have to refocus towards services, to reduce its exposure to the vicissitudes of global consumer downturns.
In late February 2009, it emerged that the prices Japanese firms were paying for services had fallen to their lowest level in nearly 21 years, sparking fears that Japan was again at risk of the deflationary problems that blighted its economy in the late 1990s.
In January 2009, the International Monetary Fund issued a forecast saying that Japan’s economy would shrink by 2.6% in 2009—a bigger drop than the Fund was forecasting for either the United States or European Union. However, many economists believe that a contraction of 4% is more likely in the current year. As recently as November 2008, the IMF was predicting that Japan’s growth rate would outpace those of its rivals.
Support for Inward Investment and Imports
The Manufactured Imports & Investment Promotion Organization (Mipro) is the agency responsible for promoting foreign direct investment, and imports into Japan. The Japan External Trade Organisation (Jetro, also known as “Invest Japan”) has a particular focus on foreign direct investment. The Ministry of Economy, Trade and Industry is also worth contacting.
Tax Exemptions
Foreign Access Zones (FAZs) have been established around ports and airports to integrate import-related facilities. These offer a range of incentives to facilitate imports, including exemptions from land-holding taxes. For further information contact the National Tax Agency of Japan.
Statistics
GDP growth: 0.7% (2008, est.)
GDP per capita: US$35,300 (2008, est.)
CPI: 1.8% (2008, est.)
Key interest rate: 0.1% (since December 2008)
Exchange rate versus dollar: Yen per US dollar—103.58 (2008, est.)
Unemployment: 4.2% (2008, est.)
FDI: US$139.7bn
Current account deficit/surplus: −U$187.8bn (2008, est.)
Population: 127.3 million (July 2008, est.)
Source: CIA World Factbook except where stated
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