Japanese Economy

Despite scarce natural resources and high import dependency, Japan has the world’s second most technologically advanced economy (behind the U.S.) and the third economy in the world, as measured in terms of the size of economic and industrial potential, behind the U.S. and China. Japan’s dependence is particularly evident when it comes to the import of raw materials for energy and agricultural products. Despite this, thanks to extremely advanced sectors of industry, banking, insurance, real estate, transport, telecommunications and construction, Japan realised a surplus in goods exchanges until recently.

Japanese exports are dominated by motor vehicles, semiconductors, chemical products, office equipment and electronics, while its most important export markets are China, the United States, the Republic of Korea, Thailand and Hong Kong. The country imports fuels, machinery and equipment, food, chemical and textile products, mainly from China, the U.S., Australia, Saudi Arabia, the United Arab Emirates, the Republic of Korea and Qatar. Additionally, Japan is one of the EU’s most important trading partners. Exports from the EU to Japan are growing steadily (machinery and transport equipment, chemicals and agricultural products), as an import (in the same sectors, except agriculture), with a deficit on the Japanese side.

Preliminary data from the Ministry of Finance indicate that exports in 2014 increased year-on-year by 4.8%, to $620 billion, while imports increased by 5.7% and amounted to $767.7 billion. The deficit increased by 11.4% compared to 2013, which was the worst result since the start of tracking trade with foreign countries in 1979. Sales of automobiles, electrical appliances and equipment on foreign markets grew five per cent. Exports to China rose by as much as 15 per cent, while exports heading to the U.S. rose by 5.6%.

The OECD expects Japan to continue recording growth in exports, due to the weak yen policy and a gradual increase in trade globally. It is also expected that inflation, which was around 0% in the first half of 2015, will slowly begin to grow to about 1.5% in late 2016, while the unemployment rate will continue to fall.

Export growth is particularly important due to the foreign trade deficit that has been present consecutively for the last 24 months. That is why Prime Minister Shinzo Abe unveiled a package of measures which imply increasing liquidity (in order to increase the availability of capital for companies), the purchase of government bonds by the Japanese central bank (to alleviate the public debt), an aggressive monetary policy (furthering reduction of the value of the yen), the renewing of infrastructure (planned engagement of a large number of companies, fiscal incentives for research and development and job creation) and structural reforms to improve competitiveness.

The plan of fiscal reforms implies a reduction in income taxes and raising taxes for citizens, which should increase government revenue by 500 billion yen. Both measures are a reaction to the present outflow of capital from Japan and an attempt to mobilise huge resources that are dormant through various forms of savings, mainly in the possession of an ageing population.

Part of the plan is also to increase the salaries of employees. For example, car manufacturer Toyota announced that it will raise workers’ salaries by an average of 4,000 yen (33 dollars) per month, about 1.14% higher than the current salary.
Toyota employees will also receive an average bonus in the amount of 6.8 basic monthly salary payments. The second-largest Japanese car manufacturer, Nissan, will raise the wages of its workers by 5,000 yen per month, with bonuses of 5.7 basic monthly salary payments.

Electronics manufacturers Panasonic and Toshiba will increase wages by 3,000 yen per month, compared to last year’s growth of 2,000 yen. Wage growth in Japan is particularly significant because of the first increase in the sales tax in 17 years, which endangered the pace of economic recovery.

The decision to increase consumer tax to 8% (compared to the previous 5%) came into effect as of 1^st April 2014, and is combined with the so-called stimulus package (worth $50 billion), and relates to the population with lower income, increasing salaries in the corporate sector, incentives for business start-ups, investment in research and development, employment and the introduction of high technology.

Prime Minister Abe recently reshuffled his cabinet again and appointed a special minister to ensure the implementation of his “100 million”, which – in addition to the aforementioned increase in GDP, implies a number of other measures, including increasing the birth rate and strengthening social measures

Also contributing to economic growth should be the fact that Tokyo is set to host the 2020 Summer Olympic Games, and the country is planning a series of major infrastructure projects. One of them is the construction of the Tokyo-Osaka railway, which should be completed by 2045. This is a super hi-speed rail line for trains that travel without friction on magnetic levitation rails, with speeds exceeding 500 km per hour. The first part of the railway, between Tokyo and Nagoya, should be completed by 2027.

According to OECD forecasts, for now, Japan’s economic growth is not particularly impressive, while the shift could largely be attributed to the very low price of oil and the expected gradual recovery of world trade. In its March forecast, the OECD announced that it expects economic growth in Japan of 0.75% this year, and from 1.5% in 2016.

Prime Minister Abe recently voiced his aim of Japanese GDP reaching a rate of two per cent growth, but many economists express doubt that this is possible, bearing in mind that this would mean that GDP would have to grow by 491 trillion yen at the end of the last fiscal year, with more than 600 trillion yen over the next five years.

According to the latest statistics, following a sharp deterioration in the second quarter, sluggish private consumption and weaker economic growth among Japan’s neighbours threaten to exert new pressures on the economy. According to the latest economic surveys, Japanese manufacturers are more inclined to pessimism, especially given that the weaker growth of China also influences slowing exports. Prime Minister Abe recently reshuffled his cabinet again and appointed a special minister to ensure the implementation of his “100 million”, which – in addition to the aforementioned increase in GDP, implies a number of other measures, including increasing the birth rate and strengthening social measures.

It should be considered that Japan is highly indebted (public debt exceeds 240% of GDP). Until recently this did not represent a significant problem, because the main creditors of Japan are its citizens. However, with an ageing population and changing habits, the concern is growing that this public debt will not be as easy to service in the long term. About 95% of Japanese government debt is wasted in debts to banks, insurance funds and private individuals. A problem is that the citizens who actually lend to the state are all older (a quarter of the population is over 64), while young people are reluctant to buy government bonds and spending on pensions and health insurance is growing (800 billion yen per year).

When it comes to the overall economic environment, analysts are particularly concerned that, despite incentives measures applied, caution prevails among foreign investors mainly because of complex relations with China, but also the increasing relocation of production to China and Southeast Asian countries. It is already clear that Japan is gradually losing political influence, due to newly developing countries, complex relationships with neighbours, competition and an internal crisis.