June 5, 2013Japan Economyby EW World Economy Team

Japan Economy

Japan was the 3rd largest economy in the world for 2012, by GDP (current prices, US dollars) and the 4th largest by GDP (PPP). In 2012, Japan's GDP (current prices, US dollars) was US$5.963 trillion and its GDP (PPP) was US$4.628 trillion. Much of Japan’s modern economic success can be traced to two significant periods in its history- the pre-war Meiji Era and the post-war Economic Miracle.

The Japanese were one of the earliest nations in Asia to industrialise. During the Meiji restoration period in the mid 19th century, the Japanese government actively pursued Western-style reforms and development – hiring more than 3,000 Westerners to teach modern science, mathematics and technology to Japan.

The Meiji government also created a conducive business environment for private businesses to thrive. Shipyards and factories were built by the government and sold at extremely low prices to entrepreneurs. These entrepreneurs eventually began businesses that quickly expanded into conglomerates known as the Zaibatsu.

The Zaibatsu controlled much of Japan’s economic and industrial activity. By the start of World War II, the Big Four Zaibatsu – Mitsubishi, Mitsui, Sumitomo and Yasuda – had control of over more than 30 percent of Japan's mining, chemical, metals industries, 50 percent of the machinery and equipment market, and 60 percent of the commercial stock exchange. The Zaibatsu also developed interlocking relationships among themselves and Japanese policy makers, thus allowing them a level of control over government policies.

Although World War II devastated most of the Japanese economy, the social foundations laid down during the Meiji Era contributed to the post-war economic miracle from the 1960s to the 1980s. New constitutional and economic policies implemented by the US during the American occupation of 1945-1952, also contributed to the eventual recovery of the Japanese economy. Furthermore, although there were attempts to dissolve the Zaibatsu system, the Zaibatsu managed to evolved into the Keiretsu with the six major Keiretsu being Mitsubishi, Sumitomo, Fuyo, Mitsui, Dai-ichi Kangyo and Sanwa Groups.

However the greatest contributing factor of the Japanese Economic Miracle was the establishment of the Ministry of International Trade and Industry (MITI) in 1949. MITI implemented numerous policies that led to heavy industrial growth in Japan. Many scholars have described MITI to have had the greatest impact on the economy of a nation than any other governmental regulation or organisation in the world. According to prominent political scientist Chalmers Johnson, author of MITI and the Japanese Miracle, “MITI formalized cooperation between the Japanese government and private industry. The extent of the policy was such that if MITI wished to “double steel production, the neo-zaibatsu (keiretsu) already has the capital, the construction assets, the makers of production machinery, and most of the other necessary factors already available in-house”.

During the post-war economic miracle from the 1960s to the 1990s, Japan experienced huge economic growth – at an average of 10 percent annually in the 1960s, 5 percent in the 1970s, and 4 percent in the 1980s.

Growth in the 1990s slowed down largely due to the asset price bubble in late 1980s, and the crash of the Tokyo Stock Exchange in 1990-92. This period is termed as the “Lost Decade” in Japan.

In 2012, Japan posted a GDP growth rate (constant prices, national currency) of 1.996 percent – one of the fastest growing economies among the G-7 nations for the year.

In 2013, GDP growth is expected to reach 1.584 percent or higher, with a new economic strategy – labelled Abenomics after Prime Minister Shinzo Abe – set to encourage private investment and end persistent deflation. But while Abenomics is likely to revive and boost the economy in the near future, it fails to address significant long-term economic challenges: A huge government debt (the highest debt to GDP ratio in the world), a shrinking and aging population and weak consumption are problems that continues to weigh heavily on the economy.

Japan Economic Profile

Japan’s Economic Structure

Japan has a population of 127.25 million in 2013, with a labour force of 65.02 million. Japan's unemployment rate for 2012 was 3.3 percent. One of the biggest challenges for the Japanese government face is its aging population and a negative population growth rate. Japan has one of the highest proportions of elderly citizens aged over 65 in the world – at about 24.8 percent of the population. Much of this problem is due to its low birth rate and high life expectancy. Japan has a total fertility rate of 1.39, which is the 17th lowest in the world.

Japan has a land area of 364,485 square km. 70 percent of Japanese land is forested and unsuitable for agricultural, industrial or residential uses. As such, much of Japan’s economic activity is concentrated in major cities such as Tokyo, Yokohama and Osaka.

With only about 15 percent of its land being arable, Japan imports about 60 percent of grain and fodder crops from other countries, and relies on imports for most of its meat products. Japan is also the largest market for EU and third largest market for US' agricultural exports.

With its lack of natural resources, Japan rely on the imports of commodities such as fuels, foodstuffs, chemical, textiles and raw materials from various countries for its industrial sectors. Japan is the world's third largest oil importer, with 5.033 million barrels per day to meet 45 percent of its energy needs in 2009. Japan boasts the largest fishing fleets in the world, accounting for almost 15 percent of the global catch.

Find out more about Japan’s Economic Structure at EconomyWatch.com

Japan’s Industry Sectors

Despite an overall stagnation on the economy for nearly two decades, Japan’s industries are still among the most highly advanced and innovative in the world. Japanese manufacturing products, particularly in electronics and automobiles, are the world leaders in both production and technological advancements in their respective fields.

In 2012, Industry was responsible for 27.5 percent of Japan's GDP. Major industries in Japan include motor vehicles, electronic equipment, machine tools, steel and nonferrous metals, ships, chemicals, textiles, and processed foods.

Japan’s automobile industry produces the second largest amount of vehicles in the world behind China. However, Japanese automobile companies remain among the most valuable and technologically advanced in the world. Japan is home to six of the top twenty largest vehicle manufacturers in the world – Toyota (1st), Renault-Nissan (4th), Honda (8th), Suzuki (10th), Mazda (14th), Mitsubishi (16th). The automobile industry also managed to register a massive 10.5 percent growth in 2009, in spite of the global financial crisis.

Japan is also the world’s largest electronics manufacturer with prominent companies such as Sony, Casio, Mitsubishi Electric, Panasonic, Canon, Fujitsu, Nikon, Yamaha etc. Japanese electronic products are renowned for their innovation and quality. However the turmoil from the 2011 tsunami/earthquake disaster greatly affected its industries, dropping Japan from the 8th highest industrial production growth rate in the world in 2010 to the 8th worst in 2011.

Despite the historical significance of Japanese manufacturing, Services are the dominant component of the economy – contributing to 71.4 percent of the GDP in 2012. Major services in Japan include banking, insurance, retailing, transportation and telecommunications.

The Tokyo Stock Exchange is the third largest stock exchange in the world by market capitalisation – with a total market capitalization of US$3.3 trillion as of December 2011. Japan is also home to 326 companies from the Forbes Global 2000.

Agriculture’s contribution to Japan’s economy is fairly small when compared to Industry and Services. In 2012, Agriculture made up only 1.2 percent of the nation’s GDP. Although its contribution appears minute, agriculture is still a highly important component of Japan’s economy and society.

Japan’s agricultural economy is highly subsidised and protected. Only 15 percent of Japanese land is suitable for agriculture, though any available land is highly cultivated. As such, Japan has one of the highest per hectare crops yields in the world. Though it has a small agriculture sector, Japan is self-sufficient in the production of rice and fish, but relies heavily on food imports such as wheat, corn, sorghum and soybeans from the US. This makes US the third largest market for Japan's agricultural imports.

Find out more about Japan’s Industry Sectors at EconomyWatch.com

Japan’s Export, Import & Trade

Japan is the 5th largest importer and exporter in the world. Japan imports raw materials and pays for them by processing the raw materials, thus adding value to them before exporting the output. In recent years, Japan has been the top export market for 15 trading nations worldwide.

In order to greater facilitate bilateral trade, Japan adopts Economic Partnership Agreements (EPAs) According to former Japanese Prime Minister Taro Aso, countries move on to discuss higher-level issues in EPAs, such as "devising framework through which investment can take place in a secure manner, or developing a mechanism to ensure protection of intellectual property rights". The list of Japanese EPAs include those with ASEAN, Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam, Australia, Chile, India, Mexico, Peru, Korea and Switzerland. ASEAN-Japan Comprehensive Economic Despite Japan’s extensive list of EPA partners, China remains as Japan’s largest export and import partner. In 2012, 19.7 percent of Japan’s exports went to Japan while 21.5 percent of Japanese imports came from China.

Find out more about Japan’s Import, Export & Trade at EconomyWatch.com

Japan’s Economic Forecast

The size of the economy – GDP (PPP) – is expected to increase by 3.25 percent to US4.779 trillion in 2013. After which, it will experience steady but modest increases of between 3.09 percent and 3.43 percent to reach US$5.619 trillion in 2018.

Similarly, Japan’s GDP (PPP) per capita is also expected to increase annually by fairly consistent margins. In 2012, Japan had the 24th highest GDP (PPP) per capita in the world at US$36,265.75. By 2013, Japan’s GDP (PPP) will increase by 3.47 percent to reach US$37,525.38; and from 2014 to 2018, Japan’s GDP (PPP) per capita will see annual increases ranging from 3.35 percent to 3.71 percent. By the end of 2018, Japan will have the 21st highest GDP (PPP) per capita in the world at US$44,803.82

Japan has been struggling to combat deflation for more than a decade. From 1999 to 2009, there were only three years in which Japan did not experience deflation. Even then, inflation (average consumer price change) was minimal - 0.243 percent for 2006, 0.061 percent for 2007 and 1.378 percent in 2008.

With Abenomics, the Japanese government has set a 2 percent inflation target for the next few years. In 2013, the IMF predicts that inflation will only reach just 0.062 percent, but it believes that Japan will be able to meet its target from 2014 onwards through to 2018. In 2014, inflation (average consumer price change) is expected to reach 2.967 percent. From 2015 to 2018, the average inflation rate will be 2.05 percent.

Japan had the world's second largest current account balance surplus in 2010 at US$204.301 billion. However, this figure shrank by 41.5 percent in 2011 to US$119.304 billion due to weakened exports as well as a surge in energy imports after the nuclear meltdown. In 2012, the current account surplus dropped once more by 50.6 percent to US$58.963 billion – making it the 9th largest in the world. Forecasts predict that Japan’s current account surplus will see a gradual recovery starting from 2013 and reach US$102.919 billion in 2018.

Find out more about Japan’s Economic Forecast at EconomyWatch.com

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