Economic development and outlook in Japan
Article 3 minute read

Economic development and outlook in Japan

14 May 2018

Though many worry over the government’s deficits and deflation in recent decades, Japan’s economy seems to be progressing better than the world perceives.

Japan’s economy has slowly regained its spot as one of the world’s most attractive investment destinations.

“Since the late 1990s, the growth in Japan’s real GDP per head has outperformed every other major economy. And unlike other major economies, income inequality in Japan has not increased, remaining amongst the lowest in the developed world.” Dhaval Joshi of BCA Research stated in a Financial Times news report.

Here’s a breakdown of Japan’s economic development and outlook.

Japan's GDP growth expected to continue

As of 31 December 2017, the country recorded eight straight quarters of GDP growth, marking 0.5% growth in the last quarter of 2017. This is the longest continuous improvement the country’s economy has seen since the 1980s.

Bank of Japan expects the country to continue its expansion in the fiscal year 2019 on a moderate level, due to a seasonal slowdown in business fixed investments and the scheduled consumption tax hike.

Consumption tax hike coming in 2019

A consumption tax hike in Japan to 10% from the current 8%, is scheduled to take place in October 2019. This move will affect GDP growth rates given foreseen slower domestic demand and lower disposable income levels.

However, the negative impact on the projected growth rate for fiscal year 2019 is expected to be smaller than seen on the rate for fiscal year 2014, when the last consumption tax hike took place. Companies may not need to worry as much about a possible profit slump given the market has pretty much now factored in the tax hike.

Higher confidence levels among small and medium-sized businesses

Small and medium-sized business confidence in Japan has improved significantly. This is thanks to the eight quarters consecutive GDP growth that resulted from global demand for exports which pushed record corporate profits and rising business investments.

According to the Bank of Japan’s December Tankan (Short-Term Economic Survey of Enterprises), large manufacturers’ overall assessment of business conditions improved for the fifth straight quarter, hitting an 11-year high of +25. The confidence index among small and medium-sized businesses reached +15, the highest level recorded since August 1991.

Unemployment rate lingers around 2% - 3%

Japan’s unemployment rate continues to stay in the range of 2% to 3%, while labour participation of women and senior citizens is increasing steadily. 

As a whole, Japan’s economic growth will be supported by the increasing numbers in the labour force and healthy rise in wage levels.

Household spending in Japan remains strong

The Consumption Activity Index (CAI, travel balance adjusted) which is calculated by combining various sales and supply-side statistics, increased in 2017.  This was in part due to the replacement demand for automobiles and household electrical appliances, improved sales at department stores and a recovery in demand from foreign visitors to Japan.

At the same time, services consumption maintained moderate increases reflecting a rise in communications charges as well as medical, health care and welfare fees.

Inflation rate catching up to target

The average Consumer Price Index (CPI) of Japan in 2017 stood at 0.47% and this is a positive signal given the country has battled deflation for many years.

Though it is still a distance from achieving the central bank’s target of 2%, Bank of Japan believes it is within reach, backed by the improvement in the output gap and the rise in medium to long-term inflation expectations.

2020 Tokyo Olympic Games: an expected boost

Tokyo is hosting the 2020 Olympic Games, and the Japanese government laid out the investment needed to welcome this significant event, especially on infrastructure.

Businesses can expect to thrive with the influx of tourists and rise in consumption during the games, as has been witnessed by Brazil (2016) and South Korea (Winter Olympics 2018).

Corporation profits and business investments

Both corporate profits and business fixed investments have been growing at a strong pace. Supported by steady local firms and overseas market demand, Japan is on track to continue this positive trend.

However, the rate of growth in corporate profits may face stumbling blocks as the allocation to households increases further, such as in the form of a rise in personnel expenses.

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