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After the return of independence in 1952, the Japan economy started changing and growing. Sustained economic growth was also fueled by Japan’s young and well-educated workforce, capital from high domestic savings rate, and guidance, support, and subsidies from an activist government and bureaucracy.
Following the second world war, new factories grew that used the latest technologies, becoming more efficient than foreign competition. From the 1960s onwards, the Japanese economy shifted its focus to high-quality and high-technology products aimed at both domestic and foreign consumption. The nation eventually became a global leader in several industries, including electronics, automobiles, shipbuilding, steel, and high technology.
After fighting deflation for more than two decades, former Prime Minister Shinzo Abe launched a three-pronged approach to revitalize the economy in 2013, called “Abenomics”. This refers to a set of fiscal and monetary policies that combined fiscal stimulus, monetary easing, and structural reform.
After Abe’s resignation in September 2020, first Yoshihide Suga was elected to succeed Abe, then in November 2021 Fumio Kishida followed as Japan’s 100th Prime Mininister. Kishida vowed to revamp the Abenomics programme.
The coronavirus pandemic severely affected the world’s third largest economy, that was already stagnating. The 2020 real Gross domestic product (GDP) for Japan was at -4.6%, the first recorded decline over a decade. In 2021, the economy could recover and expanded by 1.7% in real terms, government data showed.
In 2022, despite the lifting of Covid curbs the world’s third-largest economy was struggling. However, Japan still recorded 1.1% GDP-growth that year. For this year, IMF predicts Japan to grow 1.3%.
Japan GDP Annual Growth Rate (in %)
Currency and Central Bank
Japanese yen, the official currency of the nation, is the third most traded currency in the foreign exchange market behind the US dollar and the Euro.
The Bank of Japan (BOJ), also referred to as Nichigin, is the central bank of Japan and is responsible for the country’s monetary policy, issuance and management of banknotes, and providing stability to the country’s financial system.
Japan Economy: Inflation (in %)
Japan has one of the lowest inflation rates worldwide. But the times have changed, and inflation is also picking up in Japan. In 2022, inflation stood at 2.5% and IMF forecasts 2.7% for 2023.
Rising inflation is putting increasing pressure on the BOJ, which is pursuing an unusually loose monetary policy by international standards. This has severely weakened the yen, which further fuels inflation through more expensive imports.
In October 2022, Japan unveiled an stimulus package worth about $200 bn to cushion the inflation. Kishida said that the government will take “drastic easing measures to protect people’s livelihoods from high prices” and emphasised the need to target energy prices, “the main cause of the price surge”, according to him.
Industry and Trade
Japan’s biggest sector is service, which comprises about 32% of the nation’s GDP. The major service industries in the country include banking, real estate, retailing, insurance, telecoms, and transportation. Several Japanese service firms are among the largest companies in the world, such as Softbank, Nomura, Mitsubishi Estate, ÆON, and Japan Airlines.
The manufacturing sector in the country is also considered to be the most diversified due to its numerous successful and advanced industries, making up about 20% of Japan’s GDP. Due to its high technological development, it is considered a leading manufacturer of consumer electronics, automobiles, optical media, and semiconductors.
The government has also established the Digital Agency in 2021 to speed up digitalization of the public sector and also introduced tax incentives to encourage private sector digitalization.
In terms of total exports, the Japan economy ranked fourth globally in 2022. Its top export products are transport equipment (motor vehicles and parts), machinery, electrical machinery and manufactured goods. The country’s main export partners are the US and China.
Japan Balance of Trade
Meanwhile, Japan is the fourth-largest importer in the world, with mineral fuels (e.g. coal and LNG), electrical machinery, chemicals as its main import products. The country’s three biggest import countries are China, Australia and the US.
Stock Exchanges and Capital Markets
The Tokyo Stock Exchange (TSE), part of Japan Exchange Group, is the second-largest stock exchange in Asia. TSE is the fifth-largest stock exchange in the world, listing more than 3,700 companies as of September 2022, with a combined market capitalization of $4.97 tn.
The top five companies listed on the TSE in terms of market capitalization are automobile manufacturer Toyota Motor Corporation, consumer electronics conglomerate Sony Corporation, automation equipment manufacturer Keyence Corporation, financing group MUFG Inc., and multinational conglomerate holding company SoftBank Group Corp.
The Nikkei 225 or the Nikkei Stock Average is a price-weighted index, commonly used for the TSE, along with the Tokyo Stock Price Index or TOPIX.
Bond Market
As of the quarter ended September 2022, Japan’s local currency bond market was valued at $9.08 tn, consistently declining since the quarter ended December 2020. The yen’s decline has hit yields of Japanese bonds, and the Bank of Japan has carried out bond-buying operations a couple of times in 2022. The country’s foreign currency bonds outstanding have consistently increased over the past few quarters, coming at $587.52 bn during the quarter that ended September 2022.
However, despite the volatility seen in the yen, foreign holdings in Japan’s local currency government bonds have remained fairly stable, with foreigners holding 13.64% of the total government bonds as of the quarter that ended in June 2022.
The S&P Japan Bond Index, which tracks the performance of local-currency government and corporate bonds, has fallen by over 4% in 2022.
The BOJ is the biggest driver in the Japanese bond market. With the aim of keeping long-term interest rates no higher than about 0.25 %, the central bank has expanded its purchases of government bonds. At the end of October 2022, it held a record 51.3% of long-term government bonds (536.6 tn yen).
Real Estate Market
Japan’s real estate investment market ranks second globally in terms of market size, after the US. As per 2021-22 report by MSCI Real Estate Market Size Report, Japan’s market size rose to $947.1 bn in 2021 from $939.9 bn in 2020.
In terms of real estate transactions, there are no differences in system application between domestic and overseas investors.
Foreigners and foreign companies can own real estate in Japan, purchase real estate without restrictions regardless of real estate type, and trade real estate without public notice of transactions.
Between 2008 to 2022, Japan’s Housing Index averaged 107.36 points, recording an all-time high of 132.75 points in April 2022 and an all-time low of 97.26 points in October 2009.
Japan Housing Index (in %)
Source of charts: tradingeconomics.com
