Unfortunately, the 2011 Japanese earthquake and tsunami has threatened to derail the Japan’s economic growth.  On April 2011, the Japanese government was forced to downgrade its assessment of the economy for the first time in six months. According to the Economics Minister Kaoru Yosano, “The biggest risks, or uncertain factors for the economy, are when power supplies will recover and whether the nuclear situation will keep from worsening."

Although the Japanese government is optimistic that the economy will pick up towards the end of the year, the economic forecast for Japan from 2011 onwards seem to indicate otherwise. Japan's GDP growth rate (constant prices, national currency) for 2011 is expected to be at 1.398 percent. The GDP growth rate (constant prices, national currency) from 2012 to 2016 will also not exceed anything more than 2.068 percent with the lowest estimate of 1.192 percent in 2016.

Apart from the economic damage caused by the earthquake and tsunami, Japan also faces other problems that will hurt its economy. A huge government debt, persistent deflation and a shrinking and aging population are expected to have significant impact on the economy as well.

Japan’s GDP Forecast

Japan was the 3rd largest economy in the world for 2010, according to both GDP (current prices, US dollars) and GDP (PPP). Japan's GDP (Current Prices, US dollars) was US$5.458 trillion and its GDP (PPP) was US$4.309 trillion.

Although Japan’s GDP (PPP) is expected to increase by 2.51 percent in 2011, Japan will be replaced by India as the third largest economy in the world by the end of the year. Japan’s GDP (PPP) will experience slow and steady annual growth between 2.25 percent and 4.22 percent from 2012 to 2016. By the end of 2016, Japan's GDP (PPP) will grow to US$5.145 trillion.

Similarly, Japan’s GDP (PPP) per capita is also expected to increase annually by fairly consistent margins. In 2010, Japan had the 25^th highest GDP (PPP) per capita in the world at US$33,804. The following year, Japan’s GDP (PPP) will increase by 2.49 percent to reach US$34,645.99. From 2012 to 2016, Japan’s GDP (PPP) per capita will see an annual increase ranging from 3 percent to 3.64 percent. By the end of 2016, Japan will have the 24^th highest GDP (PPP) per capita in the world at US$40,806.32.

Japan’s Unemployment Forecast

Japan had the lowest unemployment rate among the G7 nations in 2010 at 5.058 percent. Prior to the 2008 financial crisis, Japan’s average unemployment rate from 2004 to 2008 was 4.221 percent. Although the financial crisis caused a slight increase in unemployment, the unemployment figure is expected to improve annually over the next few years. By the end of 2016, unemployment in Japan is expected to drop to 4.151 percent.

However many analysts believe that the reason for the drop could be a matter of a shrinking labour force rather than new job creation. Japan’s aging labour force means that more people are dropping out of the labour force every year. In 2007, the Japanese labour force consisted of 64.125 million people. However by the end of 2010, the labour force had shrunk to 62.564 million. Japan’s labour force will continue to decrease to 2012 at least. By the end of 2012, the Japanese labour force is expected to drop to 62.217 million.

Japan’s Inflation Rate & Current Account Balance Forecast

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 rates (average consumer price change) were at 0 percent for two years (2004 and 2007) and a mere 0.3 percent in 2006. In 2010, Japan experienced deflation once again with an inflation rate (average consumer price change) of negative 0.698 percent.

Japan is likely to overcome deflation in 2011; though it is more of a result of food and energy shortages caused by the tsunami, rather than that of monetary policies having any effect. In 2011, Japan’s inflation rate (average consumer price change) is expected to reach 0.156 percent. From 2012 to 2016, inflation (average consumer price change) is expected to increase in Japan though it is unlikely to go over the 1 percent mark. Inflation (average consumer price change) is expected to peak at 0.985 percent in 2016.

Japan has the world's second largest current account balance at US$194.754 billion – behind China and slightly ahead of Germany. The Japanese current account balance was at its peak in 2007 at US$210.967 billion but dropped significantly during 2008 and 2009 to US$141.751 billion. Having recovered from the financial crisis, Japan’s current account balance in 2010 was 37.39 percent higher than it was in 2009.

However, in the aftermath of the earthquake and tsunami, Japan’s current account balance is expected to decline sharply by 31.15% in 2011 to hit US$134.083 billion.  The decline in Japanese's exports coupled with the strengthening of the Yen means that Japan’s current account balance is likely to decline even further. By 2016, Japan’s current account balance is expected to fall to US$131.471 billion.