Japan flag Japan: Economic and Political Overview

The economic context of Japan

Economic Indicators

Japan, the world's third-largest economy, is highly exposed to external impacts due to its heavy reliance on exports. This vulnerability has manifested itself in recent years, as its economy has experienced periods of recession alongside the global economic slowdown. Following a robust first half of 2023, economic activity in Japan tapered off during the latter part of the year, influenced by sustained high inflation and subdued global demand. The International Monetary Fund projected a growth rate of 2% for 2023, reflecting a slowdown in domestic demand and a rebound in imports. Real GDP growth is expected to decelerate to 1% in 2024 and further to 0.7% in 2025 (IMF), as the cyclical downturn compounds structural challenges, including a swiftly ageing society, diminishing labour supply, and limited innovative capacity within the economy, all of which curtail Japan's potential growth trajectory.


Japan has the highest debt-to-GDP ratio in the world: estimated at 260.1% in 2022, it declined to 255.2% last year. The government's financing capacity benefits from low bond yields, which are sustained by the central bank's monetary strategy and the broad domestic investor base. The IMF sees the debt ratio declining to 250.6% of GDP by 2025. In 2023, the fiscal deficit stood at approximately 5.7% of GDP, driven by a substantial array of measures introduced to offset the escalating cost of living. These measures included subsidies for electricity, gas, and oil, as well as cash assistance to families with children. In October 2023, a new round of fiscal stimulus was unveiled, extending energy subsidies until the close of 2023 and offering support to small and medium-sized enterprises. Additionally, the government plans to augment military spending over the next five years to achieve a target of 2% of GDP by 2027. However, fiscal support is anticipated to gradually diminish within the projected timeframe, with the fiscal deficit expected to decrease steadily to 2.6% of GDP by 2025. Following its peak at 4.3% in January 2023, headline inflation moderated to 3% by September 2023, attributed to decreased energy prices and special policy-related factors such as subsidies for gas and electricity. For the year as a whole, the IMF estimated inflation at 3.2%. Annual average inflation is expected to decline gradually to 2.9% in 2024 and further to 1.9% in 2025 (IMF), as softening domestic demand is partly offset by increasing wage pressures and the discontinuation of energy subsidies. Monetary policy is likely to remain accommodative throughout the forecast horizon. However, the increasing disparity between headline interest rates in Japan and globally may lead to additional yen depreciation and upward pressure on government bond yields.

The demographic troubles faced by Japan are getting more serious. An ageing society causes a big challenge for the country, as the government’s expected spending on pensions and health care is set to keep on rising. Additionally, a declining birth rate leads to a significant decrease in the population, and as a result a decrease in the number of taxpayers. Japan’s working-age population has been declining for a few decades, but that has been offset by rising participation, helping in employment growth and maintaining a low unemployment rate (at 2.5% in 2023, with a marginal decline to 2.3% expected over the forecast horizon as per the IMF).

 
Main Indicators 20222023 (E)2024 (E)2025 (E)2026 (E)
GDP (billions USD) 4,237.534,230.864,286.194,524.634,710.14
GDP (Constant Prices, Annual % Change) 1.02.01.00.70.5
GDP per Capita (USD) 33,85433,95034,55536,65738,358
General Government Balance (in % of GDP) -6.8-5.7-3.8-2.6-2.7
General Government Gross Debt (in % of GDP) 260.1255.2251.9250.6251.1
Inflation Rate (%) n/a3.22.91.91.6
Unemployment Rate (% of the Labour Force) 2.62.52.32.32.3
Current Account (billions USD) 90.62141.18157.01164.55165.01
Current Account (in % of GDP) 2.13.33.73.63.5

Source: IMF – World Economic Outlook Database, October 2021

Main Sectors of Industry

Even though Japan has some deposits of gold, magnesium, coal and silver, the country has very limited natural resources overall and, as a result, is highly dependent on imports to meet its raw material and energy needs. On the other hand, thanks to its large maritime area, the country is one of the world’s largest producers of fishing products. However, given that only 11% of Japan’s surface is suitable for cultivation, the agricultural sector is small, contributing marginally to GDP (1%) and employing only 3% of the workforce (World Bank, latest data available). Tea and rice are the country’s two largest crops, though the sector as a whole is highly subsidised and protected. Other major crops are corn, wheat, soybeans, barley, peanuts, rapeseed, and oats. The 5-year average harvested area for various crops is as follows: rice covers 1.5 million hectares (MHA), wheat 214,000 hectares (ha), soybeans 146,000 ha, barley 62,000 ha, peanuts 8,000 ha, and corn 1,200 ha. In terms of production volume, rice leads with an average of 10.4 million metric tons (mmt), followed by wheat at 991,000 metric tons (mt), soybeans at 224,000 mt, barley at 218,000 mt, peanuts at 20,000 mt, corn at 5,400 mt, rapeseed 4,000 mt, and oats 1,000 mt (data USDA).

Japan’s industrial sector represents 28.8% of GDP and employs 24% of the workforce (World Bank). The Japanese industrial sector is a multifaceted landscape characterized by a blend of traditional and innovative industries. Historically, Japan has been renowned for its manufacturing prowess, particularly in the automotive, electronics, and machinery sectors. Companies like Toyota, Sony, and Panasonic have shaped the global industrial landscape. Additionally, Japan leads in advanced manufacturing technologies, robotics, and precision engineering, fostering a competitive edge in industries such as robotics, semiconductors, and high-tech materials. With a focus on innovation, Japan continues to explore emerging sectors such as renewable energy, biotechnology, and artificial intelligence, leveraging its strong research and development capabilities and skilled workforce to maintain its position as a global industrial leader. The country was the world’s third-largest producer of cars and of ships in 2022.

The service sector accounts for around 69.9% of GDP and employs over 73% of the workforce. Dominating this sector are finance, insurance, and real estate, reflecting Japan's status as a global financial hub. Retail and wholesale trade also play significant roles, with iconic Japanese brands like Uniqlo contributing to both domestic and international commerce. Moreover, Japan's hospitality and tourism industry attracts millions of visitors annually (25 million tourists in 2023, reaching 79% of pre-COVID level, data JNTO). Emerging sectors in Japan's tertiary landscape include healthcare and eldercare services, driven by the country's ageing population, as well as information technology and digital services.

 
Breakdown of Economic Activity By Sector Agriculture Industry Services
Employment By Sector (in % of Total Employment) 3.2 23.7 73.1
Value Added (in % of GDP) 1.0 28.8 69.9
Value Added (Annual % Change) 3.3 4.9 2.3

Source: World Bank, Latest Available Data. Because of rounding, the sum of the percentages may be smaller/greater than 100%.

 

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Indicator of Economic Freedom

Definition:

The Economic freedom index measure ten components of economic freedom, grouped into four broad categories or pillars of economic freedom: Rule of Law (property rights, freedom from corruption); Limited Government (fiscal freedom, government spending); Regulatory Efficiency (business freedom, labour freedom, monetary freedom); and Open Markets (trade freedom, investment freedom, financial freedom). Each of the freedoms within these four broad categories is individually scored on a scale of 0 to 100. A country’s overall economic freedom score is a simple average of its scores on the 10 individual freedoms.}}

Score:
74,1/100
World Rank:
23
Regional Rank:
6

Economic freedom in the world (interactive map)
Source: Index of Economic Freedom, Heritage Foundation

 

Business environment ranking

Definition:

The business rankings model measures the quality or attractiveness of the business environment in the 82 countries covered by The Economist Intelligence Unit’s Country Forecast reports. It examines ten separate criteria or categories, covering the political environment, the macroeconomic environment, market opportunities, policy towards free enterprise and competition, policy towards foreign investment, foreign trade and exchange controls, taxes, financing, the labour market and infrastructure.

Score:
7.79/10
World Rank:
20/82

Source: The Economist Intelligence Unit - Business Environment Rankings 2020-2024

 

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Latest Update: February 2024

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