The coronavirus pandemic is “a crisis like no other”, says the chief economist of the International Monetary Fund (IMF), Gita Gopinath. With the world in lockdown, economies worldwide suffer. According to the IMF, the cumulative loss to the global gross domestic product, could amount to $9 trillion — more than the economies of Germany and Japan combined.

For Japan, Asia’s second-biggest economy, the IMF predicts an economic contraction of 5.2% this year. In 2019, Japan has shown moderate annual growth with 0.7%.

Japan economy: GDP constant prices

Japan Economy Overview

However, Japan has established itself as one of the most important nations on the planet economically. The Japan economy is the third largest in the world by nominal GDP, behind the United States and China. This represents an extraordinary transformation in a relatively short period of time, with nearly half of the population of the country having made its living through agriculture when the Pacific War began in 1937.

The economy of Japan grew massively in the second half of the 20th century, due to what is often referred to as the ‘Japanese economic miracle’. Japan benefited from the Cold War tension between the Soviet Union and the United States, whereby aid and assistance provided by the US Marshall Plan coupled with economic interventionism led to rapid industrialisation. Manufacturers, suppliers, distributors, and banks collaborated closely in groups referred to as keiretsu, and Japan rapidly became a major economic power.

This inexorable rise was to stall in the 1990s, when a massive asset price bubble in the nation burst. Both real estate and stock market prices had become hugely inflated by 1991, and in 1992 the situation finally came to a head. This decline had a massive impact on the modern history of the country, with land prices taking over 25 years to finally rise again following the depression.

Economic problems in the country have also led the Japanese government to take on large amounts of debt over the last few decades, meaning that Japan has the highest ratio of public debt to GDP of any developed nation. This is currently around 235% relative to its GDP, with most debt being owned by Japanese nationals.

Population and Demographics

The population of Japan is 126.8 million, which makes the country the tenth most populated on the planet, marginally ahead of Mexico. Japan is currently experiencing something of a demographic crisis, owing to falling birth rates and minimal immigration. This has led to a greying population, particularly as Japan also boasts one of the highest life expectancies in the world, of 85 years-old. And, based on current data, Japan’s population is projected to fall by one-million people per year; widely recognised as being a potentially calamitous scenario.

Japan Economy - Population

Unemployment in Japan is fairly rare, with the current rate being just 2.2%. This is a much lower level of unemployment than occurs in most comparable European and North American countries. Due to the effects of coronavirus, the unemployment rate is expected to rise this year.

Japan economy: Unemployment rate

Currency and Central bank

The Japanese currency is the yen, which is notable for having a vast number of units exchangeable for other major currencies. The yen is also known for being the third most traded currency in the foreign exchange market after the United States dollar and the euro, and is also sometimes used as a reserve currency.

Japan’s central bank is The Bank of Japan, sometimes referred to in the country as Nichigin. The bank was formed in 1882 as a result of the Bank of Japan Act. Shortly afterwards, the institution was given a monopoly on controlling Japan’s monetary supply. The bank was later reorganised, following the Bank of Japan Act of 1942, while its policies were focused throughout the 1970s and 1980s on helping Japan transition to a large open economy with a variable exchange rate.

The Bank of Japan has implemented a monetary policy “aimed at achieving price stability, thereby contributing to the sound development of the national economy.” As a consequence of this, very low levels of inflation have been recorded in Japan in recent years, with the inflation figure being 0.47% for the most recent calendar year. Japan has even recorded several periods of deflation in recent years.

Japan economy: Inflation

Monetary policy meetings are held by the Bank of Japan eight times per year, with the Policy Board of the bank consisting of the Governor, the two Deputy Governors, and the six other members.

Industry and Trade

Although Japan’s economy is considerably less agrarian than has been the case historically, agriculture remains important in the country. It contributes 1.4% of the national GDP, but 12% of the land in the country is cultivated for farming. Japan has the highest level of crop output per unit area in the world, and a total agricultural self-sufficiency ratio of approximately 50%.

However, manufacturing has become extremely important in Japan, with the country being a noted leader in technology. In recent years, Japan has also developed rapidly in such fields as biochemistry and the country is renowned as being a technological powerhouse, with fingers in many different pies. Japan’s car industry is also hugely successful, with the country boasting such well-known companies as Toyota, Honda, Nissan, Suzuki, Mazda, Mitsubishi, Isuzu, Subaru, Kawasaki, Yamaha, Suzuki, and Honda. However, due to the COVID-19 pandemic, industrial production is decreasing.

Tourism also plays an important role in Japan and has taken a severe hit due to the coronavirus outbreak. Also the Olympic Games planned for Tokio in summer 2020 had to be postponed.

A government report in April said the economy was “in a severe situation, extremely depressed by the novel coronavirus”. The term “recovering” was not used for the first time since July 2013.

Japan economy – trade figures

In 2019, Japan shipped goods worth $705.7 billion around the globe – a 4.4% decline since 2018. Top export destinations for Japan by value are Asian countries (57.3%), North America (22.7%) and Europe (13.5%).

The top 3 exports of Japan are vehicles ($148.8b), machinery including computers ($137b) and Electrical machinery, equipment ($103.1b). Japan’s top imports are mineral fuels including oil ($155.6b), electrical machinery, equipment ($98.8b) and machinery including computers ($70.5b). Together those three product groups account for almost 45% of Japan’s imports. The imports totaled $720.9 billion in 2019 – a 3.7% drop since 2018.

Hence, Japan has achieved a trade deficit of $14,95b in 2019 – making it the second year with a negative balance.

Survey and Rankings

Japan is ranked 29th on the Ease of Doing Business Index of the World Bank, and a very healthy 6th in the Global Competitiveness Report. Japan’s economic freedom score is 72.1, making its economy the 30th freest in the 2019 Index.

Comparison Japan, China, Korea: Global Ease of Doing Business Index

Compared with China and South Korea, Japan’s rank has been a stable second in the Ease of Doing Business Index, while China’s status rose over the years.

Stock Exchanges and Capital Markets

The most significant stock exchange in Japan is the Tokyo Stock Exchange, which is the third largest in the world based on the aggregate market capitalisation (US$5.67 trillion) of its listed companies. The Tokyo Stock Exchange merged with the Osaka Securities Exchange in 2013. The leading and most-respected index of Japanese stocks is the Nikkei 225, which first came into operation in 1950. This index rose rapidly during Japan’s ‘bubble years’, before seeing over 80% of its value being wiped out between 1992 and 2008.

Among the major companies listed on the Nikkei 225 are Toyota Motor Corporation, Honda Motor Company, Mitsubishi Corporation, SoftBank Group, Sony Corporation and Nippon Telegraph and Telephone.

Capital markets in Japan were rapidly liberalised during the 1960s and early 1970s, under pressure from overseas governments. But the trading environment in Japan continues to be dominated by native companies. The number of foreign companies listed in Tokyo is diminishing, and this has called into question its ongoing status as an international financial centre.

Bond Market

The Japanese bond market is worth $9.3 trillion. Over 40% of these are owned by the Japanese government, after the state implemented an aggressive policy of purchasing bonds, in an attempt to propel the country’s low annual inflation rate toward its 2% target. Interest rates in Japan have been virtually zero for over 15 years, and the country currently has a negative interest rate.

Returns from Japanese bonds are notoriously low compared to many other countries. For foreigners, two-year Japanese government bonds yield around 3% when swapped to dollars.

Standard & Poor’s credit rating for Japan stands at A+, with the country having a positive outlook. Moody’s credit rating for Japan is A1, with a stable outlook. Fitch’s credit rating for Japan was last reported at A, again with a stable outlook.

Real Estate Market

The real estate market in Japan was reeling for many years from one of the largest asset bubbles in history, which subsequently burst in 1992. This has meant that real estate value has stagnated in the country for decades, while the Japan government’s policy of extensive house building has also meant that supply has kept up with demand.

This has meant that although there was moderate growth in house prices in the latter years of the previous decade, the market had already begun to decline again by 2010, with prices currently flatlining. According to recent surveys, the average price of a new house listed for sale in Japan is about $337,000.