Economic and Political Overview

flag Japan Japan: Economic and Political Overview

In this page: Economic Outline | Political Outline

 

Economic Outline

Economic Overview

Japan, the world's third-largest economy, is highly exposed to external impacts due to its heavy reliance on exports. This vulnerability has manifested itself in recent years, as its economy has experienced periods of recession alongside the global economic slowdown. After growing 1.7% in 2023, the economy contracted in early 2024 due to temporary supply disruptions but recovered in the latter half. Domestic demand, particularly private consumption, strengthened, though net external demand remained weak, resulting in an estimated 0.3% growth for the year. Real GDP is expected to expand by 1.1% in 2025, driven by domestic demand, before stabilizing at 0.8% in 2026 (IMF). Private consumption will benefit from strong wage growth, easing inflation, and recent government support. Business investment will be boosted by significant profit gains, partly due to the weak yen and government subsidies for green and digital initiatives.

Japan has the highest debt-to-GDP ratio in the world: estimated at 249.7% in 2023, it increased to 251.2% last year. However, negative real interest rates significantly support debt dynamics, with a downward trajectory expected over the forecast horizon (246.9% of GDP by 2026, as per the IMF forecast). In the long term, rising ageing-related costs could challenge debt stabilization without social security reforms or measures to boost potential growth. Japan's general government deficit fell to 1.9% of GDP in FY23 (ended March 2024) from 3.5% in FY22, driven by inflation-boosted revenues and a spending cut of over 2% of GDP as pandemic-related support was scaled back (Fitch Ratings). High corporate profits have supported tax revenues, while expenditures for economic recovery, including household and SME transfers, have been partly phased out. The fiscal deficit is expected to rise slightly in 2025 due to increased spending on defence, child-related measures, and industrial policies. The central bank's monetary strategy and strong domestic investor base help maintain low bond yields and support government financing despite gradual policy tightening. Japan's rating is further bolstered by persistent current account surpluses, a large external asset position, and the yen's reserve currency status. After decades of near-zero inflation, Japan's economy shows signs of reaching a new equilibrium. Inflation has exceeded the Bank of Japan's 2% target for over two years, supported by energy and food prices, while services inflation remains weaker. The IMF estimated an inflation rate of 2.2% in 2024, forecasting a minor decrease for this year and 2026 (around 2%).

The demographic troubles faced by Japan are getting more serious. An ageing society causes a big challenge for the country, as the government’s expected spending on pensions and health care is set to keep on rising. Additionally, a declining birth rate leads to a significant decrease in the population and as a result a decrease in the number of taxpayers. Japan’s working-age population has been declining for a few decades, but that has been offset by rising participation, helping in employment growth and maintaining a low unemployment rate (at 2.5% in 2024, with a stable outlook over the forecast horizon as per the IMF). Finally, Japan enjoys a high GDP per capita, estimated at USD 54,907 in 2024 by the IMF (PPP).

 
Main Indicators 2023 (E)2024 (E)2025 (E)2026 (E)2027 (E)
GDP (billions USD) 4,219.834,070.094,389.334,584.644,742.53
GDP (Constant Prices, Annual % Change) 1.70.31.10.80.6
GDP per Capita (USD) 33,89932,85935,61137,38838,884
General Government Balance (in % of GDP) -4.3-6.2-3.1-2.8-2.9
General Government Gross Debt (in % of GDP) 249.7251.2248.7246.9245.7
Inflation Rate (%) 3.32.22.02.02.0
Unemployment Rate (% of the Labour Force) 2.62.52.52.52.5
Current Account (billions USD) 150.01154.03158.70160.83160.14
Current Account (in % of GDP) 3.63.83.63.53.4

Source: IMF – World Economic Outlook Database, Latest data available.

Note : (E) Estimated data

 

Main Sectors of Industry

Even though Japan has some deposits of gold, magnesium, coal and silver, the country has very limited natural resources overall and, as a result, is highly dependent on imports to meet its raw material and energy needs. On the other hand, thanks to its large maritime area, the country is one of the world’s largest producers of fishing products. However, given that only 11% of Japan’s surface is suitable for cultivation, the agricultural sector is small, contributing marginally to GDP (1%) and employing only 3% of the workforce (World Bank, latest data available). Tea and rice are the country’s two largest crops, though the sector as a whole is highly subsidised and protected. Other major crops are corn, wheat, soybeans, barley, peanuts, rapeseed, and oats. The 5-year average harvested area for various crops is as follows: rice covers 1.5 million hectares (MHA), wheat 214,000 hectares (ha), soybeans 146,000 ha, barley 62,000 ha, peanuts 8,000 ha, and corn 1,200 ha. In terms of production volume, rice leads with an average of 10.4 million metric tons (mmt), followed by wheat at 991,000 metric tons (mt), soybeans at 224,000 mt, barley at 218,000 mt, peanuts at 20,000 mt, corn at 5,400 mt, rapeseed 4,000 mt, and oats 1,000 mt (data USDA). Japan's agricultural, fisheries, and forestry product exports hit a record USD 9.6 billion in 2024, rising 3.7% from the previous year, driven by growing international demand for Japanese cuisine.

Japan’s industrial sector represents 26.9% of GDP and employs 24% of the workforce (World Bank). The Japanese industrial sector is a multifaceted landscape characterized by a mix of traditional and innovative industries. Historically, Japan has been renowned for its manufacturing prowess, particularly in the automotive, electronics, and machinery sectors. Companies like Toyota, Sony, and Panasonic have shaped the global industrial landscape. Additionally, Japan leads in advanced manufacturing technologies, robotics, and precision engineering, fostering a competitive edge in industries such as robotics, semiconductors, and high-tech materials. Overall, the World Bank estimates that the manufacturing sector alone accounts for 19% of GDP, making Japan the fourth-biggest manufacturing country. Nevertheless, Japan's industrial output fell by 2.3% year-on-year in 2024, marking the third consecutive annual decline (governmental data). The drop was driven by the temporary shutdown of Toyota Motor Corp. and other automakers' plants in the first half of the year following a certification scandal. In recent years, Japan continued to explore emerging sectors such as renewable energy, biotechnology, and artificial intelligence, leveraging its strong research and development capabilities and skilled workforce to maintain its position as a global industrial leader.
 
The service sector accounts for around 71.4% of GDP and employs over 73% of the workforce. Dominating this sector are finance, insurance, and real estate, reflecting Japan's status as a global financial hub. Retail and wholesale trade also play significant roles, with iconic Japanese brands like Uniqlo contributing to both domestic and international commerce. Moreover, Japan's hospitality and tourism industry attracts millions of visitors annually: the country welcomed a record 36.9 million international visitors in 2024, a 47.1% increase from the previous year, surpassing the pre-pandemic record of 31.9 million in 2019 by 5 million (data Japan National Tourism Organization). Emerging sectors in Japan's tertiary landscape include healthcare and eldercare services, driven by the country's ageing population, as well as information technology and digital services.

 
Breakdown of Economic Activity By Sector Agriculture Industry Services
Employment By Sector (in % of Total Employment) 3.0 23.7 73.3
Value Added (in % of GDP) 1.0 26.9 71.4
Value Added (Annual % Change) 10.9 -1.3 3.9

Source: World Bank, Latest data available.

 

Find more information about your business sector on our service Market Reports.

Indicator of Economic Freedom

Definition:

The Economic freedom index measure ten components of economic freedom, grouped into four broad categories or pillars of economic freedom: Rule of Law (property rights, freedom from corruption); Limited Government (fiscal freedom, government spending); Regulatory Efficiency (business freedom, labour freedom, monetary freedom); and Open Markets (trade freedom, investment freedom, financial freedom). Each of the freedoms within these four broad categories is individually scored on a scale of 0 to 100. A country’s overall economic freedom score is a simple average of its scores on the 10 individual freedoms.

Score:
74,1/100
World Rank:
23
Regional Rank:
6

Economic freedom in the world (interactive map)
Source: Index of Economic Freedom, Heritage Foundation

 

Business environment ranking

Definition:

The business rankings model measures the quality or attractiveness of the business environment in the 82 countries covered by The Economist Intelligence Unit’s Country Forecast reports. It examines ten separate criteria or categories, covering the political environment, the macroeconomic environment, market opportunities, policy towards free enterprise and competition, policy towards foreign investment, foreign trade and exchange controls, taxes, financing, the labour market and infrastructure.

Score:
7.79/10
World Rank:
20/82

Source: The Economist Intelligence Unit - Business Environment Rankings 2020-2024

 

Country Risk

See the country risk analysis provided by Coface.

 

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Political Outline

Current Political Leaders
Emperor: Naruhito (since 1 May 2019); succeeded his father who abdicated on 30 April 2019
Prime Minister: Shigeru Ishiba (since 1 October 2024)
Next Election Dates
House of Representatives: October 2028
House of Councillors: July 2025
Current Political Context
Former Liberal Democratic Party (LDP) Secretary-General Shigeru Ishiba was elected leader of the ruling party and became Japan's new Prime Minister in early October 2024. He succeeded Prime Minister Fumio Kishida, who opted not to seek re-election, citing his intention to take responsibility for the LDP's fundraising scandal and to demonstrate the party's capacity for change.
The new administration’s economic policies are expected to align largely with those of its predecessor, focusing on wage increases and job market reforms. Ishiba’s own economic agenda highlights wealth redistribution and rural revitalisation as key priorities. However, Ishiba’s administration faced significant challenges after the ruling LDP-Komeito coalition lost its majority in the Lower House elections. Determined to capitalise on his high approval ratings, Ishiba dissolved the Lower House shortly after taking office, calling for a snap election, but this decision backfired. In the 27 October election, the ruling coalition secured only 215 seats, falling short of the 233-seat threshold needed for a simple majority in the 465-seat chamber—a situation not seen since 2009. As a result, the government now relies on opposition support for passing legislation, adding to political instability.
Concerning foreign policy, Ishiba has proposed strengthening Japan’s defence capabilities by creating an "Asian version of NATO" and exploring the possibility of sharing U.S. nuclear weapons in the region. These moves aim to bolster alliances with the U.S. and possibly other partners like South Korea. However, such a strategy may be perceived as anti-China. To balance this, Ishiba has called for a more diplomatic approach to stabilise Sino-Japanese relations, acknowledging the importance of their deep trade and investment ties.
Main Political Parties
The main political parties represented in the parliament include:

- The Liberal Democratic Party (LDP): centre-right, conservative, nationalist, liberal, populist
- The Constitutional Democratic Party of Japan (CDP): centre to centre-right, liberal
- Komeito (NK): centre-right, conservative, pacifist, in coalition with the LDP
- Social Democratic Party (SDP): centre-left to left-wing, social-democratic
- Japan Innovation Party (Ishin): conservative, right-wing, populist
- Democratic Party for the People (DPP): centre to centre-right
- Japanese Communist Party (JPC): left-wing to far-left, socialist; more than doubled its representation in the last election
- Reiwa Shinsengumi: left-wing, populist and progressive
- NHK Party: populist
- Okinawa Social Mass Party: local party represented in the parliament, social-democratic
- Sanseitō: right-wing, populist
- Yūshi no Kai: centre
- Conservative Party of Japan (CPJ): ultranationalist, right-wing populist.
Type of State
Japan is a constitutional monarchy with a parliamentary regime.
Executive Power
The head of State is the Emperor and the role is largely ceremonial. The leader of the majority party or leader of the majority coalition in the parliament (House of Representatives) is normally appointed Prime Minister by the Emperor after being nominated by the National Diet. The Prime Minister is the Head of the Government and enjoys executive powers, which include implementation of the law and running of day-to-day affairs. The Cabinet is appointed by the Prime Minister.
Legislative Power
The legislature in Japan is bicameral. The parliament, called the National Diet, consists of the House of Councillors (the upper house) and the House of Representatives (the lower house). The House of Councillors contains 248 members, elected through a popular vote for six-year terms, with half of the membership being renewed every three years. The House of Representatives contains 465 members, elected through a popular vote for four-year terms. The Constitution of Japan states that the nation's 'highest organ of state power' is the National Diet. The executive branch of government is directly or indirectly dependent on the support of the National Diet, which is often expressed through a vote of confidence.
 

Indicator of Freedom of the Press

Definition:

The world rankings, published annually, measures violations of press freedom worldwide. It reflects the degree of freedom enjoyed by journalists, the media and digital citizens of each country and the means used by states to respect and uphold this freedom. Finally, a note and a position are assigned to each country. To compile this index, Reporters Without Borders (RWB) prepared a questionnaire incorporating the main criteria (44 in total) to assess the situation of press freedom in a given country. This questionnaire was sent to partner organisations,150 RWB correspondents, journalists, researchers, jurists and human rights activists. It includes every kind of direct attacks against journalists and digital citizens (murders, imprisonment, assault, threats, etc.) or against the media (censorship, confiscation, searches and harassment etc.).

World Rank:
67/180
 

Indicator of Political Freedom

Definition:

The Indicator of Political Freedom provides an annual evaluation of the state of freedom in a country as experienced by individuals. The survey measures freedom according to two broad categories: political rights and civil liberties. The ratings process is based on a checklist of 10 political rights questions (on Electoral Process, Political Pluralism and Participation, Functioning of Government) and 15 civil liberties questions (on Freedom of Expression, Belief, Associational and Organizational Rights, Rule of Law, Personal Autonomy and Individual Rights). Scores are awarded to each of these questions on a scale of 0 to 4, where a score of 0 represents the smallest degree and 4 the greatest degree of rights or liberties present. The total score awarded to the political rights and civil liberties checklist determines the political rights and civil liberties rating. Each rating of 1 through 7, with 1 representing the highest and 7 the lowest level of freedom, corresponds to a range of total scores.

Ranking:
Free
Political Freedom:
1/7
Civil Liberties:
1/7

Political freedom in the world (interactive map)
Source: Freedom in the World Report, Freedom House

 

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Latest Update: March 2025