Japan Economic Structure

Japan is the third largest economy in the world behind the US and China. Much of its modern success can be defined by two significant periods of economic progress – the pre-war Meiji Era and the post-war Economic Miracle.

Japan is the third largest economy in the world behind the US and China. Much of its modern success can be defined by two significant periods of economic progress – the pre-war Meiji Era and the post-war Economic Miracle.

During the Meiji era (1868-1912), the Japanese government implemented a ‘Rich State and Strong Army Policy’ – designed to rapidly industrialise the nation in order to catch up to the west.  Simultaneously, the Meiji government also started to radically transform the education system by sending thousands of students to the US and Europe and also bringing in more than 3000 foreign teachers into Japan to teach modern science, mathematics, technology, and foreign languages.

The Meiji government also provided economic conditions where private business could prosper. 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 were industrial and financial business conglomerates that 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 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 had interlocking relationships with each other and Japanese policy makers, allowing them a level of control over government policies.

Although much of Japan’s economic infrastructure were destroyed during World War II, the formal education received by Japanese during the Meiji period coupled with a strong business know-how, laid the foundations for the post-war Economic Miracle. The US also institute new constitutional and economic policies that greatly benefitted the Japanese during the American occupation between 1945-1952. Furthermore, although there were attempts to dissolve the Zaibatsu system, the US eventually rescinded the policy in the wake of the emergence of Communism in Asia. The Zaibatsu has since evolved into the Keiretsu with the six major Keiretsu being Mitsubishi, Sumitomo, Fuyo, Mitsui, Dai-ichi Kangyo and Sanwa Groups. 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.

Today, Japan is one of the most advanced and high tech economies in the world. Due to the nature of its economic structure, Japan has the world’s largest massive public debt – in excess of 214.3 percent of the nation’s GDP. Other challenges that the Japanese face include persistent deflation, heavy reliance on exports to drive growth, and an aging and shrinking population.

Furthermore, the 2011 earthquake and tsunami in Japan is expected to result in US$235-310 billion in damages. Much of the damage has been caused to industries and homes. The Bank of Japan has injected more than ¥325 billion into the economy to stabilize the financial market and slow down the appreciation of the yen.

Economic Geography

Even though Japan has a land area of 364,485 square km, 70 percent of its land is forested and unsuitable for agricultural, industrial or residential uses. With only about 12 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.

Population and Labour Force

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.

Industry Sectors

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.

Read more about Japan’s economy, including industry information, featured analysis and trade statistics below.