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 spread of the novel coronavirus pandemic since January 2020 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.
However, Japan is recovering. In 2021, the economy expanded by 1.7 percent in real terms, government data showed.
The International Monetary Fund in its latest WEO update, said the recovery is thanks to strong and timely policy support. For this year, the IMF expects a 3.3% growth for Japan, amid continued strong policy support, a high vaccination rate, and easing global supply constraints.
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 Inflation (in %)
Japan has one of the lowest inflation rates worldwide. In April 2013, BOJ started its Quantitative and Qualitative Monetary Easing. Despite subsequent efforts, the inflation target of 2% is yet to be reached.
In January 2022, BOJ has raised inflation forecasts to 1.1% for the fiscal year 2022-23, which is beginning in April 22.
As per the IMF, Japan’s recovery from the coronavirus pandemic is likely to strengthen this year. In the meanwhile, the fund also urged BOJ to scale down pandemic-relief measures and consider raising consumption tax rate, as well as hike property and capital income taxes.
Industry and Trade
Japan’s biggest sector is service, which comprises 31.2% of the nation’s GDP (as of FY 2019-20). 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 2020. Its top export products are automobiles, vehicle parts, integrated circuits, machinery having single functions, and passenger and cargo ships. The country’s main export partners are the US, China, South Korea, Taiwan, and Thailand.
Japan Balance of Trade
Meanwhile, Japan is the fifth-largest importer in the world (2020), with crude petroleum, petroleum gas, coal briquettes, integrated circuits, and broadcasting equipment as its main import products. The country mostly imports from China, the US, Australia, South Korea, and Saudi Arabia.
Survey and Rankings
For the World Bank’s 2020 Ease of Doing Business Index, Japan maintained its 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.
The Japan economy 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 fourth-largest stock exchange in the world, listing more than 3.700 companies as of July 2021, with a combined market capitalization of over $6.64 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.
More than 40% of Japan’s $10.2 tn 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.
In response to the epidemic, the government created three major supplemental budgets and issued a considerable amount of new issuance of government bonds in fiscal 2020.
Real Estate Market
Japan’s real estate investment market ranks second globally in terms of market size, after the US. As per 2020-21 report by MSCI Real Estate Market Size Report, Japan’s market size rose to $939.9 bn in 2020 from $881.4 bn in 2019.
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 2021, Japan’s Housing Index averaged 105.55 points, recording an all-time high of 119.32 points in March 2021 and an all-time low of 97.26 points in October 2009.
Japan Housing Index (in %)
Source of charts: tradingeconomics.com