Following a year of turmoil from the effects of the Covid-19 pandemic, the world’s third-largest economy grew less than expected. Japan’s gross domestic product (GDP) grew by annualized 11.7% in the fourth quarter of 2020, compared to the previous three months. It grew by 2.8% on a non-annualized basis, which was lower than analysts’ 3% expansion forecast. In terms of the entire past calendar year, Japan’s economy shrank by 4.8%.

Analysts expect a sharp drop off in the first quarter of 2021 due to the latest state of emergency that the government implemented since early January, amid the resurgence of Covid-19 cases in the nation, particularly in Tokyo and its neighbouring prefectures.

Japan Economy Overview

Aside from the lower-than-expected GDP growth in Q4 2020, capital expenditures increased by 4.3% from the previous quarter, slightly short of the initially estimated increase of 4.5%.

It is expected that the implemented State of emergency, which involved reduced hours at bars and restaurants in major cities, could have a negative impact on growth. This was evident in the decline of household spending in January by 6.1%, far greater than the 2.1% drop forecast by economists.

On a positive note, business investment exceeded expectations when it rose by 4.3%, higher than analysts’ prediction of a 4% increase.

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), sometimes 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.

In January 2021, consumer prices fell by 0.6% year-on-year after declining by 1.2% in December 2020. This was attributed to the impact of the pandemic on domestic consumption. The BOJ decided to maintain its key short-term interest rate at -0.1% during its January meeting.

Industry and Trade

Japan’s biggest sector is service, which comprises 68.7% of the nation’s GDP. The major service industries in the country include banking, real estate, retailing, insurance, telecoms, and transportation. This is why 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 30.1% of Japan’s GDP. Due to its high technological development, it is considered a leading manufacturer of consumer electronics, automobiles, optical media, and semiconductors.

Although agriculture still plays a significant part in Japan’s economy, it accounts for a mere 1.1% of the country’s GDP. Because only 12% of the land is arable, the country has developed a terrace system that results in one of the highest crop yields per unit area globally.

Tourism also plays a large role in the country’s economy as Japan is one of the most visited countries in Asia and the Pacific. The government hoped to attract 40 million tourists to the country through the 2020 Summer Olympics in Tokyo, but it was postponed due to the Covid-19 pandemic and was rescheduled for July 2021.

Japan Economy – cars are top exports

Japan exported $641.4 billion worth of goods globally in 2020, down 9.1% year-on-year. Among these exports, 60.5% were shipped to other Asian countries, while 21% were delivered to North America and 12.9% were sent to Europe.

Automobiles ranked as the top export product, amounting to $122.6 billion or 19.1% of total exports, followed by machinery including computers with $121.8 billion or 19%, and electric machinery and equipment with a total of $102.6 billion or 16%.

While cars and automobile parts have been the largest exports in terms of value, they fell by 17.4% and 17.2%, respectively. Exports of printing machinery and heavy machinery also went down.

On the other hand, gem and precious metals demonstrated the highest growth during the year, followed by miscellaneous chemical goods and plastics.

Economists are forecasting an 11.3% increase in exports in 2021 and 7.5% in 2022, while they expect imports to go up by 7.5% in 2021 and 7.4% in 2022.

Survey and Rankings

For the World Bank’s 2020 Ease of Doing Business Index, Japan maintained its 2019 position in the 29th spot of the list with a score of 78.0. This was far below its fellow Asian countries South Korea, Malaysia, and Taiwan but two spots ahead of China’s 31st rank.

While the World Economic Forum’s 2020 Global Competitiveness Report did not provide overall rankings due to missing data from different international organisations, the country ranked fifth in its ICT adoption list, behind South Korea, UAE, Hong Kong, and Sweden.

Japan also went up in ranking from 30th in 2020 to 23rd in the Heritage Foundation’s 2021 Index of Economic Freedom. Its overall score improved from 73.3 to 74.1.

Stock Exchanges and Capital Markets

Established in 1878, the Tokyo Stock Exchange (TSE) is the largest stock exchange in the country and Asia. TSE is the third-largest stock exchange in the world, listing more than 3.700 companies as of June 2020, with a combined market capitalization of over $5.6 trillion.

The top five companies listed on the TSE in terms of market capitalization are automobile manufacturer Toyota Motor Corporation, multinational conglomerate holding company SoftBank Group Corp., automation equipment manufacturer Keyence Corporation, drug firm Chugai Pharmaceutical Co., Ltd., and consumer electronics conglomerate Sony Corporation.

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

More than 40% of Japan’s $9.3 trillion bond market is made up of Japanese government bonds (JGBs). JGBs are integral to the central bank’s initiatives to boost inflation in the country.

These bonds are classified into general bonds, Fiscal Investment and Loan Program bonds, and subsidy bonds. Similar to US Treasuries, JCBs are backed by the federal government and are considered low risk.

The Bank of Japan recently confirmed its previous target yield for 10-year Japanese government bonds of 0.0%. However, the central bank widened its rather “unofficial” target range from +/- 0.20 to +/- 0.25%, which gives it more flexibility in asset purchases.

Real Estate Market

Amidst the economic impact of the pandemic, Japan’s property market has remained resilient. According to the Land Institute of Japan, the nationwide residential property price index increased by around 0.8% during the year to the third quarter of 2020, compared to 0.6%, 2.1%, and 2.4% in 2019, 2018, and 2017, respectively. Prices of the property also rose by 2.4% quarter-on-quarter during the period.

In the Tokyo Metropolitan Area, existing condominium average prices went up by 3.38% during the year to November 2020 to $5,432 per square meter. New condominium prices increased by 11.76% year-on-year to $8,625.

Meanwhile, in the Osaka Metropolitan area, existing condominium prices went down by 0.4% to $3,219 per sqm, while new condominium prices surged by 10.83% to $6,643 square meter.