Japan is the world’s third largest economy after the US and China. It has a credit rating and business climate on par with most developed countries, but lags on income per capita. The economy has been stuck in secular stagnation for much of the last twenty years—meaning growth has also disappointed relative to advanced economy peers.
Growth has averaged less than just 1% p.a. over the last two decades. The fallout from Japan’s asset price bubble in the late 1980s, a declining population, weak productivity and the emergence of cheaper high tech manufacturers such as China have weighed on GDP growth. Secular stagnation has also brought about deflation.
Japan’s current Prime Minister Shinzo Abe has ramped up fiscal stimulus and delivered unprecedented monetary easing in an attempt to end deflation and lift growth. Abenomics—the term for Abe’s radical rescue package—has thus far weakened the yen, a boon for exporters. But domestic spending remains weak and deflation is an ongoing threat.
Key to lifting Japan out of its rut is Abe’s promise of structural reforms. These include greater female participation in the workforce and increasingly flexible hiring policies (allowing firms to hire and fire workers).
Weak economic growth has weighed heavily on Japan’s per capita income—Japan’s per capita income was 2% higher than that of the US in 2000, fast forward 16 years and Japanese incomes are now 40% lower than that of the US. More worrying is a growing wealth gap between the richer older generation and poorer youth. The latter disproportionally affected by Japan’s rigid labour laws, which favour older established workers.
Japan enjoys an investment grade credit rating. This suggests a relatively low likelihood that it will be unable or unwilling to meet its external debt obligations in a systemic sense (though, needless to say, individual debtors can and do default).
Japan’s business climate is generally on par with most other advanced economies. It ranks 29 out of 189 economies on the World Bank’s ease of doing business gauge—which measures regulation and red tape relevant to a domestic small to mid-sized firm. But paying tax is significantly more difficult in Japan.
Japan scores in the top quartile in all areas of governance. However, it underperforms peers on measures of regulatory quality.
Japan was Australia’s largest trading partner until 2007 and largest export destination pre-2009. It has since lost top spot in both categories to China, but remains our second largest export destination and trading partner. Australia and Japan entered into a free trade agreement in Aril 2014. The FTA will allow more than 97% of Australian exports preferential treatment into Japanese markets, amongst the most that Japan has ever signed.
Merchandise exports to Japan were worth A$46b in 2014-2015 and were dominated by beef, coal and iron ore (50% of total). Exports of LNG and copper were also substantial. Japan was Australia's largest export market for beef, fish, fruit and vegetable juices, animal feed, coal, liquefied propane and butane, aluminium, transmission shafts, dairy products and natural gas.
Woodside, Mitsui and Co, MMG, Centennial Coal, and Newmont Mining are some of the Australian companies that export commodities to Japan. Teys Australia, JBS Australia and NH Foods also export beef to Japan.
Merchandise imports were worth A$18b in 2014-2015 made up mostly of passenger vehicles and refined petroleum.
Service exports to Japan were worth A$2.1b in 2014-2015, of which 60% was from tourism. Japan is Australia’s seventh largest source of tourists behind China, US, UK and New Zealand, Singapore and Malaysia.
Japanese student enrolments remain a small and declining proportion of total foreign enrolments in Australian institutions. This is consistent with an overall decline in the number of Japanese students studying overseas—driven by changing demographics, a subdued economy and graduate unemployment.
Japan is Australia’s third largest source of foreign direct investment behind the US and UK. Japan’s stock of foreign investment was worth A$200b in 2015 (7% of total investment) centred predominantly in the resource sector. But investment in financial services, infrastructure, information and communications technology, property, food and agribusiness is growing.
Japanese investment in Australia is set to rise as a result of the free trade agreement— which has lifted the barrier for screening by the Foreign Investment Review Board from A$248m to A$1.1b.
Australian investment in Japan was worth A$93.2b in 2015 equivalent to 4% of Australia’s foreign investment portfolio. This is small considering export receipts from Japan. But this is a trend that isn’t unique to Australia—Japan’s inward stock of FDI is the lowest in the OECD. Deterrents to foreign investment include language barriers, the high cost of doing business in Japan, and a restrictive foreign investment regime—although the FTA will provide enhanced protections and certainty for Australian investors in Japan.
Department of Foreign Affairs
Japan Australia Free Trade Agreement