Japan’s Investment Overview: Is the sun still rising?
Japan is the world’s fourth-largest economy, with a nominal GDP of $4.2 trillion in 2024. The country has a highly developed and diversified industrial base, a skilled and educated workforce, and a strong tradition of innovation and quality. Japan is also a major trading partner and investor for many countries, especially in Asia.
However, Japan faces several challenges that could hamper its economic growth and competitiveness in the coming years.
Japan’s economy shrank for the second quarter in a row in the October-December period of 2023, a sign of economic recession. The annual gross domestic product (GDP) growth rate plummeted to -0.4%, down from 1.9% in 2023. Japan also slipped from its position as the world’s third-largest economy to the fourth spot, now behind Germany. This reflects the decline in its population and productivity, as well as the impact of the global COVID-19 pandemic and the energy crisis.
High inflation and weak wage growth: Japan’s headline inflation reached 3.3% in October 2023, well above the Bank of Japan’s (BoJ) 2% target. This was mainly driven by rising food and energy prices, as well as the impact of the global COVID-19 pandemic and the energy crisis. Meanwhile, wage growth has been sluggish, averaging 0.8% in 2023, far below the inflation rate. This has eroded the purchasing power and confidence of consumers, who account for about 55% of Japan’s GDP. Consumer spending fell 0.3% in the third quarter of 2023, the second consecutive contraction.
Japanese Inflationary Pressures, Bloomberg 2024
Japan’s exports, which account for about 18% of its GDP, have been affected by the weakening of global demand and trade, especially from its key markets such as the United States, China, and the European Union. Japan’s goods exports grew by only 1.6% year-on-year in October 2023, down from 8.3% in September. The main driver of export growth was the surge in motor vehicle exports, which increased by 35.4% year-on-year, thanks to the recovery of pent-up demand and the weak yen. However, other major export categories, such as industrial supplies, capital equipment, and consumer goods, declined on a year-on-year basis. The outlook for global growth and trade remains uncertain, as the war in Ukraine, the food, fuel and finance crises, and the rising inflation and interest rates pose significant risks to the world economy.
Japanese Export Decline, Deloitte Insights 2023
Japan’s public debt reached 266% of its GDP in 2023, the highest among the advanced economies. This reflects the large fiscal stimulus packages that the government has implemented to support the economy during the COVID-19 pandemic and the energy crisis. The government announced a 17 trillion yen (about $117.7 billion) fiscal package in December 2023, which included temporary tax cuts and fuel subsidies, to offset the impact of high inflation on consumers. However, the government also faces the need to consolidate its fiscal position and reduce its debt burden, as well as to address the long-term challenges of population aging and social security spending. The government has set a medium-term fiscal target of achieving a primary balance surplus by 2027, which would require a significant increase in tax revenues and a reduction in expenditures
.
Despite these challenges, Japan also has some opportunities to boost its economic growth and competitiveness in the future.
Increase in foreign direct investment (FDI) and outward investment: Japan has the opportunity to increase its FDI and outward investment, which could bring positive benefits for its economy and society. FDI could help to enhance Japan’s productivity, competitiveness, and innovation, by bringing in new technologies, skills, capital, and markets. FDI could also create more jobs, income, and tax revenues for Japan, and contribute to its regional development and social diversity. Japan’s FDI stock was estimated at about $256.9 billion in 2023, which is relatively low compared to other developed countries. The government has set a target of increasing its FDI stock to $1 trillion by 2030, and has implemented various measures to attract and facilitate foreign investment, such as simplifying regulations, improving infrastructure, and providing incentives and support.
On the other hand, outward investment could help Japan to diversify its risks, access new opportunities, and strengthen its global presence and influence. Japan is one of the main investors worldwide, with an outward investment stock of about $1.98 trillion in 2023. Japan’s outward investment is mainly oriented towards finance and insurance, transportation equipment, electric machinery, communication, and chemicals and pharmaceuticals. Japan could also explore new sectors and regions for its outward investment, such as green energy, digital technology, health care, and emerging markets.
Diversification and innovation of exports and industries: Japan has the potential to diversify and upgrade its exports and industries, by tapping into new markets and sectors, and by enhancing its innovation and quality. Japan has been actively pursuing free trade agreements (FTAs) with various countries and regions, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the Regional Comprehensive Economic Partnership (RCEP), and the EU-Japan Economic Partnership Agreement (EPA). These FTAs could help to expand Japan’s access to new and growing markets, especially in Asia, and to reduce its trade barriers and costs.
Japan could also leverage its strengths in advanced manufacturing, digital technology, green energy, and health care, to develop new products and services that meet the changing needs and preferences of global consumers. Japan ranks fourth in the world in terms of research and development (R&D) spending, and has a high number of patents and scientific publications. Japan could also foster a more conducive environment for innovation and entrepreneurship, by promoting start-ups, venture capital, and collaboration between industry, academia, and government.
Recovery of domestic demand and moderation of inflation: Japan’s economy is expected to recover moderately in 2024, as the vaccination program progresses and the COVID-19 situation improves. The government’s fiscal package is also expected to provide some support to consumer spending in the near term. Moreover, inflation is expected to moderate in the second half of 2024, as the base effects of the energy price hikes fade and the global supply chain disruptions ease. The BoJ has also started to adjust its monetary policy settings, by raising its short-term policy rate from -0.1% to 0% in December 2023, and signaling further hikes in 2024, to contain inflation expectations and support the yen. This could help to improve the real income and savings of consumers, and to stimulate private investment.
In conclusion, Japan’s economic prospects are mixed, as it faces both opportunities and challe
nges in the coming years. Japan will need to overcome the difficulties posed by recession, high inflation, global slowdown, and fiscal consolidation, while seizing the potential benefits of FDI, export diversification, innovation, and domestic recovery. Japan will also need to balance its domestic and external interests, and to cooperate with its partners and allies, to cope with the complex and uncertain global environment. Japan has the capacity and the resilience to achieve these goals, and to maintain its economic and social well-being.
References
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