Last updated: February 2023
Japan is the third largest economy in the world, behind the US and China. Japan’s per capita incomes, business climate rank and creditworthiness are broadly in line with other advanced economies. But Japan significantly lags on GDP growth.
|The above chart is a cobweb diagram showing how a country measures up on four important dimensions of economic performance—per capita income, annual GDP growth, business climate rank and creditworthiness. Per capita income is in current US dollars. Annual GDP growth is the five-year average forecast between 2023 and 2027. Business climate is measured by the World Bank’s 2019 Ease of Doing Business ranking of 190 countries. Creditworthiness attempts to measure a country's ability to honour its external debt obligations and is measured by its OECD country credit risk rating. The chart shows not only how a country performs on the four dimensions, but how it measures up against other countries in the region.
Japan’s economic recovery from the pandemic has been more subdued than its peers. Growth was modest at 1.7% in 2022, as supply chain disruptions held back production, investment and export growth. Domestic demand remained strong, despite inflation edging up to 4% in December 2022 amid high energy prices and persistent yen weakness.
As pent-up demand fades and high inflation cuts real wages, the economy will grow at a slower pace of 1.6% in 2023. Services exports will improve, led by tourism and nationwide travel subsidies. Japanese manufacturers will benefit from easing supply bottlenecks as China lifts its strict zero-COVID policy, although weakening global demand will constrain export growth. The Bank of Japan has indicated it will continue to keep short term interest rates low, albeit with a shift up in the long term interest rate, until it achieves a sustained consumer price increase of 2%.
The sharply lower Japanese yen provides upside and downsides to the economy. Japan is a net importer of food and energy, so further yen weakness will drive up imported inflation and increase the financal burden on households. On the uspside, the weaker yen will boost export competitivenss, including tourism. Downside risks to growth include weaker than expected external demand and further global supply chain disruptions.
Sustained economic growth has been a long-standing issue for successive Japanese governments and the outlook points to continued economic challenges. The IMF expects long-run growth to average about 0.8% per annum between 2024 to 2027. Demographic pressures continue to pose the greatest economic and fiscal challenge over the longer term. The working population aged 15 to 64 has been declining for a long period of time, a trend that is expected to continue. A shrinking population in the domestic market means Japan will likely continue to pursue growth opportunities overseas, including in Australia.
Japan has some of the highest incomes in the world. But a long period of weak economic growth and rising inflation the past year means incomes barely grew between 2015 to 2022, remaining at around US$35,000. Income inequality remains an issue, as the wealth gap between elderly generations and the youth widens. The IMF expects per capita incomes to reach US$42,300 by 2027 as the economy recovers, wages rise and inflation eases.
Country risk in Japan is low, suggesting a low likelihood that it will be unable and/or unwilling to meet its external debt obligations. Japan’s high government debt ratio, estimated at more than 260% of GDP in 2022, remains a key weight on country risk.
The risk of expropriation in Japan is low, in line with low political risk. Japan scores in the top quartile in all areas of governance but underperforms on measures of voice and accountability.
Japan was Australia’s second largest trading partner in 2021, behind China. Total goods and services trade amounted to $87.2 billion in 2021, up from $66.2 billion in 2020.
Australia and Japan entered a free trade agreement in April 2014, which grants more than 97% of Australian exports preferential treatment in Japanese markets. Australian goods exports to Japan are dominated by coal, natural gas and iron ore.
Major Japanese goods imports to Australia include motor vehicles, refined petroleum and civil engineering equipment.
Services exports to Japan totalled $960 million in 2021, down from a pre-pandemic level of $2.7 billion in 2019. Japanese student enrolments had been gradually rising before the pandemic, but have declined over the past few years. Tourism’s recovery from the pandemic has been sluggish as Japan only opened borders for visa free entry/international travel in October 2022. A year of open international borders should support further recovery in Japanese demand for Australian tourism, and broader services exports, in 2023.
Japan is Australia’s fourth largest source of foreign investment behind the US, UK and Belgium. Japan’s stock of foreign investment is centred predominantly in the resources and energy sectors, such as coal and iron ore. Japanese investment has also enabled the rapid expansion of Australia’s LNG production, particularly the $34 billion Ichthys project located about 220 kilometres off the Western Australian coast. Opportunities exist in supplying the Japanese manufacturing sector with critical minerals including lithium, graphite, vanadium, nickel and cobalt.