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-zero interest rates. Japan’s huge government debt and its aging population are two of the country’s biggest long-term problems.
Economic Policy over 12 Months
The government of Tarō Asō, who became prime minister in September 2008, declared that its top priority was insulating the economy and jobs from the escalating economic crisis. The government launched massive stimulus packages to offset the impact of the global economic downturn, but these measures were not enough to prevent the Center-Left Democratic Party of Japan from winning a landslide victory in a snap general election in August 2009, sweeping away more than 50 years of nearly unbroken rule by the conservative Liberal Democratic Party.
The new government promised to bring change to Japan’s stagnant economy, boosting growth and creating jobs by stimulating consumption, and by shifting resources to families and consumers rather than to expensive public-works projects. The country’s massive public debt would appear to preclude further stimulus spending.
In January 2010 the Standard and Poor’s ratings agency cut its outlook on Japan’s government debt, voicing disappointment with the new government’s fiscal consolidation plans. Tokyo’s debt burden is a legacy of massive stimulus spending in the 1990s to support the economy after an asset bubble burst, leading to a decade of stagnation. Rising social welfare costs to support an aging population have added considerably to the burden in recent years, while the country’s longest recession since World War II is also placing further pressure on the government’s finances.
The incoming government produced both a medium-term plan to curb borrowing and a long-term growth strategy. In March 2010, the administration said that it was aiming for real GDP growth averaging more than 2% in the next decade. The government’s plans for curbing borrowing will be hampered by its vow that it would not consider raising the consumption tax until the next elections in 2013. There is certainly scope for raising taxes, since the tax burden is one of the lowest in the Organisation for Economic Co-operation and Development (OECD).
On March 11, 2011, Japan suffered the strongest earthquake in its history, registering 9.0 on the Richter scale. The tsunami that followed peaked at 45 m as it hit Japan’s Fukushima nuclear power plants, knocking out the diesel engines which drove coolant to the cores. This triggered one of the worst nuclear accidents ever and put question marks over the use of nuclear power as a generation source. The disruption caused by the combined damages of the earthquake, the tsunami, and radiation fallout around the Fukushima area, plus the resulting power shortages across northern Japan, created considerable damage to the Japanese economy and also had a negative impact on all countries with industry sectors that relied on Japanese parts and components in their supply chains.
Economic Performance over 12 Months
The Japanese economy contracted by 5% in 2009—one of the worst recessions in its history. However, the economy grew by a better-than-expected 1.1% in the final quarter, equivalent to an annualized increase of 4.6%. Japan’s return to growth has been led by exports, particularly to China, which is now its largest overseas market. Consumer spending, which accounts for about 60% of the Japanese economy, rose 0.7% from the previous quarter, as shoppers took advantage of government incentives on cars and home appliances. However, consumer spending has since weakened again.
In April 2010, the IMF raised its outlook for Japan’s economic growth in 2010, citing rising exports, but it warned that the economy remains fragile and the central bank may need to loosen monetary policy further if deflation persists. The IMF forecast for the economy saw price-adjusted growth of 1.9% in 2010 and 2% in 2011.
In July 2011, the IMF concluded its Article IV consultation with Japan. It found that the earthquake and tsunami in March had brought the recovery in Japan to a halt. The destruction was far in excess of the 1995 Great Hanshin earthquake near the city of Kobe and will have an adverse impact on Japan’s economy for months to come. However, there are some positive signs that the economy is starting to shrug off some of the worst effects of the disaster. Household spending is improving and figures from Japanese industrial output suggest that a recovery in industry is now underway, with supply chains being restored faster than was expected.
Japan continues to run a large net surplus from its export activities, which has allowed the current account to remain in surplus. By July, Japan’s equity markets had regained two thirds of the falls they experienced after the quake struck and 10-year Japanese government bond yields have been stable at around 1.1–1.2%. Supply conditions are expected to normalize through the summer with a pickup in growth for the second half of 2011 as the positive effects of reconstruction spending make themselves felt. Rising demand for exports is expected to sustain growth through 2012. The IMF still expects some slight contraction of the Japanese economy in 2011, of around 0.7%, due to the effects of the earthquake and tsunami, with growth rising to 2.9% in 2012. Headline inflation is expected to be zero in 2011 and 2012, with some deflationary trends as a result of the wide output gap.
According to the IMF, the fiscal costs of the earthquake are likely to be between 2% to 4% of GDP, spread over the next five to ten years. Reconstruction costs are going to weigh heavily on Japan’s fiscal deficit, pushing it to 10.5% of GDP in 2011, with a net debt-to-GDP ratio in excess of 130%.
Support for Inward Investment and Imports
The Manufactured Imports and Investment Promotion Organization (MIPRO) is the agency responsible for promoting foreign direct investment and imports into Japan. The Japan External Trade Organization (JETRO, also known as Invest Japan) has a particular focus on foreign direct investment. The Ministry of Economy, Trade and Industry (METI) is also worth contacting.
Foreign Access Zones 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.
GDP growth: −0.7% (IMF, 2011)
GDP per capita: US$34,00 (2010 est.)
CPI: 0.0% (IMF, 2011)
Key interest rate: 0.1% (April 2010); commercial bank rate 1.6% (December 31, 2010 est.)
Exchange rate versus US dollar: ¥87.78 (2010)*
Unemployment: 5.1% (2010 est.)
FDI: US$199.4 billion
Current account surplus: US$166.5 billion (2010 est.)
Population: 126,475,664 (July 2011 est.)
* Japanese yen
Source: CIA World Factbook except where stated