Japan: Economic and Political Overview
In this page: Economic Outline | Political Outline
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) | 4,219.83 | 4,070.09 | 4,389.33 | 4,584.64 | 4,742.53 |
| GDP (Constant Prices, Annual % Change) | 1.7 | 0.3 | 1.1 | 0.8 | 0.6 |
| GDP per Capita (USD) | 33,899 | 32,859 | 35,611 | 37,388 | 38,884 |
| General Government Balance (in % of GDP) | -4.3 | -6.2 | -3.1 | -2.8 | -2.9 |
| General Government Gross Debt (in % of GDP) | 249.7 | 251.2 | 248.7 | 246.9 | 245.7 |
| Inflation Rate (%) | 3.3 | 2.2 | 2.0 | 2.0 | 2.0 |
| Unemployment Rate (% of the Labour Force) | 2.6 | 2.5 | 2.5 | 2.5 | 2.5 |
| Current Account (billions USD) | 150.01 | 154.03 | 158.70 | 160.83 | 160.14 |
| Current Account (in % of GDP) | 3.6 | 3.8 | 3.6 | 3.5 | 3.4 |
Source: IMF – World Economic Outlook Database, Latest data available.
Note : (E) Estimated data
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.
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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.
Economic freedom in the world (interactive map)
Source: Index of Economic Freedom, Heritage Foundation
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.
Source: The Economist Intelligence Unit - Business Environment Rankings 2020-2024
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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.).
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Political freedom in the world (interactive map)
Source: Freedom in the World Report, Freedom House
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