Economic and Political Overview

flag Japan Japan: Economic and Political Overview

In this page: Economic Outline | Political Outline | COVID-19 Country Response

 

Economic Outline

Economic Overview

For the latest updates on the key economic responses from governments to address the economic impact of the COVID-19 pandemic, please consult the IMF's policy tracking platform Policy Responses to COVID-19.

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. Likewise, the global economic crisis caused by the Covid-19 pandemic has had a significant impact; however, the country’s economy rebounded in 2021, with an estimated growth of 2.6% (IMF), on the back of strong exports and public consumption and investment. The IMF forecast a GDP increase of 3.2% this year (underpinned by the entry into force of the Regional Comprehensive Economic Partnership trade agreement) followed by 1.4% in 2023, although uncertainty remains due to the surge in global Covid-19 cases. Private consumption growth will remain subdued given sluggish wages.

Japan has the highest debt-to-GDP ratio in the world: estimated at 256.9% in 2021, it is expected to follow a downward trend over the forecast horizon (252.3% in 2022 and 250.8% in 2023 according to the IMF). Public finances have been affected by the measures taken to contain the Covid-19-induced crisis (about 16% of GDP in 2020-2021), which included the Employment Adjustment Subsidy, cash benefits to SMEs and concessional loans. As a result, the general government deficit stood at 8% in 2021 (down from a record level of 9.2% one year earlier). By the end of 2021, Kishida’s cabinet approved a larger-than-expected JPY 55.7 trillion fiscal stimulus package that includes more funding for universities and digitalization of rural areas, as well as financing to raise semiconductor manufacturing capacity, aimed at improving the country’s economic security. As the economy rebounds and the global situation normalizes, the IMF projects a deficit of 3.6% this year followed by a further decrease in 2023 (2%). Inflation was negative by 0.2% last year; nevertheless, inflationary pressures are building relatively quickly and the IMF expects the inflation rate to turn positive in 2022 (0.5%) before picking up to 0.7% in 2023.

Moving forward, budgetary consolidation will remain a key issue for the country as it tries to bring its debt levels under control. 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 birthrate 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. Elevated debt levels on business balance sheets could restrain employers’ ability to hire more and offer stronger wage gains. Unemployment was stable at 2.8% in 2021 but is expected to decrease marginally to 2.4% this year and 2.3% in 2023.

 
Main Indicators 20202021 (e)2022 (e)2023 (e)2024 (e)
GDP (billions USD) 5.004.004.004.004.00
GDP (Constant Prices, Annual % Change) -4.61.71.71.61.3
GDP per Capita (USD) 39e39343536
General Government Balance (in % of GDP) -8.2-6.3-7.3-3.2-2.3
General Government Gross Debt (in % of GDP) 259.4262.5263.9261.1260.3
Inflation Rate (%) -0.0-0.22.01.41.0
Unemployment Rate (% of the Labour Force) 2.82.82.62.42.4
Current Account (billions USD) 146.94142.1958.1194.39131.85
Current Account (in % of GDP) 2.92.91.42.22.9

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

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 in Japan. Tea and rice are the country’s two largest crops, though the sector as a whole is highly subsidised and protected. Agriculture contributes marginally to GDP (1%) and employs only 3.4% of the workforce.

The industrial sector is highly diversified, manufacturing products ranging from basic goods (such as steel and paper) to sophisticated technology. Japan dominates the automobile, robotics, biotechnology, nanotechnology and renewable energy sectors. Japan is home to several of the world's largest manufacturers of electronic products, which is why the country's industrial sector is often associated with technological sophistication. The country is the world’s third-largest producer of cars and the second-largest producer of ships. Its industrial sector represents 28.7% of GDP and employs 24.2% of the workforce.

The service sector accounts for 69.3% of GDP and employs 72.4% of the workforce. Major services in Japan include banking, insurance, retailing, transportation and telecommunications. The country also has a significant tourism sector, which has seen substantial growth in recent years. Due to the crisis and the travel bans triggered by the Covid-19 pandemic, tourism has dropped to record levels (-87.1% y-o-y in 2020 – Japan National Tourism Organization). 2021 numbers were even lower, with only 213,063 foreign arrivals, despite the Olympic games that took place in Tokyo (where no foreign tourists were allowed to prevent the further spreading of the infection).

 
Breakdown of Economic Activity By Sector Agriculture Industry Services
Employment By Sector (in % of Total Employment) 3.4 24.2 72.4
Value Added (in % of GDP) 1.0 28.7 69.3
Value Added (Annual % Change) 1.4 -1.2 -0.0

Source: World Bank, Latest available data.

 

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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: Fumio KISHIDA (since 4 October 2021)
Next Election Dates
House of Representatives: October 2025
House of Councillors: July 2025
Current Political Context
Prime Minister Fumio Kishida of the Liberal Democratic Party (LDP) dissolved the lower house of Japan's parliament on 14 October 2021. The elections held at the end of the month saw the ruling party retaining its majority, resulting in the re-election of Kishida as Prime Minister on 10 November 2021 by the lower house with 297 votes against 108 for his opponent Yukio Edano, and in the upper house (141 vs. 60).
The Japanese government is concerned about the intensification of regional security imbalances, especially regarding China’s growing assertiveness: Japan identified the situation around Taiwan as a national security threat, with some representatives of the LDP party explicitly mentioning that a ”major incident” over Taiwan would trigger the deployment of the Self-Defense Forces (SDF).
Meanwhile, Kishida announced a series of measures under his “new capitalism” policy focusing on wealth redistribution and economic growth, as well as supporting supply chain resilience for critical goods (i.e. semiconductors and pharmaceuticals) and facilitating R&D initiatives in the technological sector.
Main Political Parties
- The Liberal Democratic Party (LDP): centre-right, conservative, nationalist, liberal, populist
- The Democratic Party of Japan (CDP): centre to centre-right, liberal
- Komeito (NK): centre-right, conservative, pacifist, in coalition with the LDP
- Japanese Communist Party (JPC): left-wing to far-left, socialist; more than doubled its representation in the last election
- Japan Innovation Party (Ishin): conservative, right-wing, populist
- Democratic Party for the People (DPP): centre to centre-right
- Reiwa Shinsengumi: left-wing, populist and progressive
- Social Democratic Party (SDP): centre-left to left-wing, social-democratic
- NHK Party: populist
- Party for Hope: right-wing to far-right, conservative, populist; opposition party
- Constitutional Democratic Party: centre-left to left-wing, liberal, pacifist; opposition party
- Japan Restoration Party (JRP): right-wing to far-right, nationalist, populist; third largest force, but is slowly losing representation
- Liberal Party: centre, centre-left
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 designated as the Prime Minister for a four-year term. 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 National Diet, consists of the House of Councillors (the upper house) and the House of Representatives (the lower house). The House of Councillors contains 242 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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COVID-19 Country Response

COVID-19 epidemic evolution

To find out about the latest status of the COVID-19 pandemic evolution and the most up-to-date statistics on the COVID-19 disease in Japan, please visit the website of the Ministry of Health, Labour and Welfare with the official data. The platform Covid19Japan also provides precise data at prefectural level.
For the international outlook you can consult the latest
situation reports published by the World Health Organisation as well as the global daily statistics on the coronavirus pandemic evolution including data on confirmed cases and deaths by country.

Sanitary measures

To find out about the latest public health situation in Japan and the current sanitary measures in vigour, please consult the dedicated section on the portal of the Japanese Prime Minister. Further details can be found on the Ministry of Health, Labour and Welfare website.

Travel restrictions

The COVID-19 situation, including the spread of new variants, evolves rapidly and differs from country to country. All travelers need to pay close attention to the conditions at their destination before traveling. Regularly updated information for all countries with regards to Covid-19 related travel restrictions in place including entry regulations, flight bans, test requirements and quarantine is available on TravelDoc Infopage.
It is also highly recommended to consult COVID-19 Travel Regulations Map provided and updated on the daily basis by IATA.
The US government website of Centers of Disease Control and Prevention provides COVID-19 Travel Recommendations by Destination.
The UK Foreign travel advice also provides travelling abroad advice for all countries, including the latest information on coronavirus, safety and security, entry requirements and travel warnings.

Import & export restrictions

For the up-to-date information on all the measures applicable to movement of goods during the period of sanitary emergency due to the COVID-19 outbreak (including eventual restrictions on imports and exports, if applicable), please consult the website of the Ministry of Economy, Trade and Industry, as well as that of Japan Customs.
For a general overview of trade restrictions due to COVID-19 pandemic, please consult the section dedicated to Japan on the International Trade Centre's COVID-19 Temporary Trade Measures webpage.

Economic recovery plan

For the information on the economic recovery scheme put in place by the Japanese government to address the impact of the COVID-19 pandemic on the national economy, please visit the website of the Prime Minister (the full version of the “Emergency Economic Measures for Response to COVID-19” is available here, in Japanese). For further details, consult the website of the Financial Services Agency.
For the general overview of the key economic policy responses to the COVID-19 outbreak (fiscal, monetary and macroeconomic) taken by the Japanese government to limit the socio-economic impact of the COVID-19 pandemic, please consult the section dedicated to Japan in the
IMF’s Policy Tracker platform.

Support plan for businesses

For the information on the local business support scheme established by the Japanese government to help businesses to deal with the economic impacts of the COVID-19 epidemic on their activity, please consult the Ministry of Economy, Trade and Industry website and the “Support for Businesses” section on the portal of the Japanese Prime Minister. Further information is available on the website of the Japan External Trade Organization (JETRO).
For a general overview of international SME support policy responses to the COVID-19 outbreak refer to the OECD's SME Covid-19 Policy Responses document.

You can also consult the World Bank's Map of SME-Support Measures in Response to COVID-19.

Support plan for exporters
To find out about the support plan for exporters put in place by the Japanese government, please consult the website of the Japan External Trade Organization (JETRO).
 

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Latest Update: November 2022