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Economic and political overview

Economic Overview

Japan, the world's third-largest economy, is highly exposed to external impacts due to its heavy reliance on exports. This vulnerability has manifested itself in recent years, as its economy has experienced periods of recession alongside the global economic slowdown. After growing 1.7% in 2023, the economy contracted in early 2024 due to temporary supply disruptions but recovered in the latter half. Domestic demand, particularly private consumption, strengthened, though net external demand remained weak, resulting in an estimated 0.3% growth for the year. Real GDP is expected to expand by 1.1% in 2025, driven by domestic demand, before stabilizing at 0.8% in 2026 (IMF). Private consumption will benefit from strong wage growth, easing inflation, and recent government support. Business investment will be boosted by significant profit gains, partly due to the weak yen and government subsidies for green and digital initiatives.

Japan has the highest debt-to-GDP ratio in the world: estimated at 249.7% in 2023, it increased to 251.2% last year. However, negative real interest rates significantly support debt dynamics, with a downward trajectory expected over the forecast horizon (246.9% of GDP by 2026, as per the IMF forecast). In the long term, rising ageing-related costs could challenge debt stabilization without social security reforms or measures to boost potential growth. Japan's general government deficit fell to 1.9% of GDP in FY23 (ended March 2024) from 3.5% in FY22, driven by inflation-boosted revenues and a spending cut of over 2% of GDP as pandemic-related support was scaled back (Fitch Ratings). High corporate profits have supported tax revenues, while expenditures for economic recovery, including household and SME transfers, have been partly phased out. The fiscal deficit is expected to rise slightly in 2025 due to increased spending on defence, child-related measures, and industrial policies. The central bank's monetary strategy and strong domestic investor base help maintain low bond yields and support government financing despite gradual policy tightening. Japan's rating is further bolstered by persistent current account surpluses, a large external asset position, and the yen's reserve currency status. After decades of near-zero inflation, Japan's economy shows signs of reaching a new equilibrium. Inflation has exceeded the Bank of Japan's 2% target for over two years, supported by energy and food prices, while services inflation remains weaker. The IMF estimated an inflation rate of 2.2% in 2024, forecasting a minor decrease for this year and 2026 (around 2%).

The demographic troubles faced by Japan are getting more serious. An ageing society causes a big challenge for the country, as the government’s expected spending on pensions and health care is set to keep on rising. Additionally, a declining birth rate leads to a significant decrease in the population and as a result a decrease in the number of taxpayers. Japan’s working-age population has been declining for a few decades, but that has been offset by rising participation, helping in employment growth and maintaining a low unemployment rate (at 2.5% in 2024, with a stable outlook over the forecast horizon as per the IMF). Finally, Japan enjoys a high GDP per capita, estimated at USD 54,907 in 2024 by the IMF (PPP).

 
Main Indicators 2023 (E)2024 (E)2025 (E)2026 (E)2027 (E)
GDP (billions USD) 4,219.834,070.094,389.334,584.644,742.53
GDP (Constant Prices, Annual % Change) 1.70.31.10.80.6
GDP per Capita (USD) 33,89932,85935,61137,38838,884
General Government Balance (in % of GDP) -4.3-6.2-3.1-2.8-2.9
General Government Gross Debt (in % of GDP) 249.7251.2248.7246.9245.7
Inflation Rate (%) 3.32.22.02.02.0
Unemployment Rate (% of the Labour Force) 2.62.52.52.52.5
Current Account (billions USD) 150.01154.03158.70160.83160.14
Current Account (in % of GDP) 3.63.83.63.53.4

Source: IMF – World Economic Outlook Database , October 2021

Country Risk

See the country risk analysis provided by La Coface.

 

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Main Sectors of Industry

Even though Japan has some deposits of gold, magnesium, coal and silver, the country has very limited natural resources overall and, as a result, is highly dependent on imports to meet its raw material and energy needs. On the other hand, thanks to its large maritime area, the country is one of the world’s largest producers of fishing products. However, given that only 11% of Japan’s surface is suitable for cultivation, the agricultural sector is small, contributing marginally to GDP (1%) and employing only 3% of the workforce (World Bank, latest data available). Tea and rice are the country’s two largest crops, though the sector as a whole is highly subsidised and protected. Other major crops are corn, wheat, soybeans, barley, peanuts, rapeseed, and oats. The 5-year average harvested area for various crops is as follows: rice covers 1.5 million hectares (MHA), wheat 214,000 hectares (ha), soybeans 146,000 ha, barley 62,000 ha, peanuts 8,000 ha, and corn 1,200 ha. In terms of production volume, rice leads with an average of 10.4 million metric tons (mmt), followed by wheat at 991,000 metric tons (mt), soybeans at 224,000 mt, barley at 218,000 mt, peanuts at 20,000 mt, corn at 5,400 mt, rapeseed 4,000 mt, and oats 1,000 mt (data USDA). Japan's agricultural, fisheries, and forestry product exports hit a record USD 9.6 billion in 2024, rising 3.7% from the previous year, driven by growing international demand for Japanese cuisine.

Japan’s industrial sector represents 26.9% of GDP and employs 24% of the workforce (World Bank). The Japanese industrial sector is a multifaceted landscape characterized by a mix of traditional and innovative industries. Historically, Japan has been renowned for its manufacturing prowess, particularly in the automotive, electronics, and machinery sectors. Companies like Toyota, Sony, and Panasonic have shaped the global industrial landscape. Additionally, Japan leads in advanced manufacturing technologies, robotics, and precision engineering, fostering a competitive edge in industries such as robotics, semiconductors, and high-tech materials. Overall, the World Bank estimates that the manufacturing sector alone accounts for 19% of GDP, making Japan the fourth-biggest manufacturing country. Nevertheless, Japan's industrial output fell by 2.3% year-on-year in 2024, marking the third consecutive annual decline (governmental data). The drop was driven by the temporary shutdown of Toyota Motor Corp. and other automakers' plants in the first half of the year following a certification scandal. In recent years, Japan continued to explore emerging sectors such as renewable energy, biotechnology, and artificial intelligence, leveraging its strong research and development capabilities and skilled workforce to maintain its position as a global industrial leader.
 
The service sector accounts for around 71.4% of GDP and employs over 73% of the workforce. Dominating this sector are finance, insurance, and real estate, reflecting Japan's status as a global financial hub. Retail and wholesale trade also play significant roles, with iconic Japanese brands like Uniqlo contributing to both domestic and international commerce. Moreover, Japan's hospitality and tourism industry attracts millions of visitors annually: the country welcomed a record 36.9 million international visitors in 2024, a 47.1% increase from the previous year, surpassing the pre-pandemic record of 31.9 million in 2019 by 5 million (data Japan National Tourism Organization). Emerging sectors in Japan's tertiary landscape include healthcare and eldercare services, driven by the country's ageing population, as well as information technology and digital services.

 
Breakdown of Economic Activity By Sector Agriculture Industry Services
Employment By Sector (in % of Total Employment) 3.0 23.7 73.3
Value Added (in % of GDP) 1.0 26.9 71.4
Value Added (Annual % Change) 10.9 -1.3 3.9

Source: World Bank - Latest available data.

 
Monetary Indicators 20162017201820192020
Japanese Yen (JPY) - Average Annual Exchange Rate For 1 USD 108.79112.17110.42109.00106.77

Source: World Bank - Latest available data.

 

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Foreign Trade

Foreign trade is an essential element of the Japanese economy, but the country is not fully open and imposes extensive non-tariff barriers, especially in the agricultural sector. Japan is among the world's largest exporters and importers of goods, and foreign trade accounts for 45% of its GDP (World Bank, latest data available). The country mainly exports motor vehicles (15.4% of all exports in 2023), being the third exporter of cars worldwide, electronic integrated circuits (4.3%), parts and accessories for motor vehicles (3.8%), semiconductors and related items (3.5%), and earth-moving machines (1.9%). The country's main imports include petroleum oils (10.8%) and gases (7%), coal (5.6%), electronic integrated circuits (3.9%), and telephones (3.7% - data Comtrade for 2023).

Japan’s main export partners in 2023 were the United States (20.2%), China (17.6%), South Korea (6.5%), Hong Kong (4.5%), and Thailand (4.1%); whereas imports came chiefly from China (22.4%), the U.S. (10.1%), Australia (8.6%), the UAE (4.9%) and Saudi Arabia (4.6%). Japan is the EU’s second-biggest trading partner in Asia after China. The two parties signed an Economic Partnership Agreement, which entered into force in 2019. Moreover, Japan signed the Regional Comprehensive Economic Partnership (RCEP), arguably the largest free trade agreement in history (its signatories include China, Australia, South Korea, etc., cumulating about 30% of global GDP). The RCEP agreement entered into force on 1 January 2022.

Traditionally, the country has a large trade surplus; however, in recent years, the trend has been inverted and the balance was negative by 1.5% of GDP in 2023 (World Bank). In the same year, Japan's exports of goods reached USD 717.3 billion (-3.9% year-on-year), while imports amounted to USD 785.6 billion (-12.4% y-o-y). Concerning the service sector, exports increased by 20.5% year-on-year to USD 204.3 billion, whereas imports - at USD 227.8 billion – increased at a slower pace (7.5%). According to preliminary figures from the Ministry of Trade, exports totalled JPY 107 billion in 2023 (+6.2%), whereas imports reached JPY 112.4 billion, marking a 1.8% increase year-on-year.

 
Foreign Trade Values 20192020202120222023
Imports of Goods (million USD) 720,957635,460768,976897,175785,615
Exports of Goods (million USD) 705,564641,319756,032746,835717,315
Imports of Services (million USD) 219,427198,034209,397211,772227,792
Exports of Services (million USD) 209,501163,838170,768169,484204,347

Source: World Trade Organisation (WTO) ; Latest available data

Foreign Trade Indicators 20192020202120222023
Foreign Trade (in % of GDP) 35.231.336.846.845.2
Trade Balance (million USD) 1,36126,64716,706-115,689-47,856
Trade Balance (Including Service) (million USD) -8,615-7,598-21,811-157,923-69,106
Imports of Goods and Services (Annual % Change) 1.0-6.85.17.9-1.4
Exports of Goods and Services (Annual % Change) -1.5-11.611.95.33.0
Imports of Goods and Services (in % of GDP) 17.815.818.625.323.4
Exports of Goods and Services (in % of GDP) 17.515.518.121.521.8

Source: World Bank ; Latest available data

Foreign Trade Forecasts 20242025 (e)2026 (e)2027 (e)2028 (e)
Volume of exports of goods and services (Annual % change) 1.22.72.11.71.6
Volume of imports of goods and services (Annual % change) 1.12.21.51.61.4

Source: IMF, World Economic Outlook ; Latest available data

Note: (e) Estimated Data

 
International Economic Cooperation
Japan is a member of the following international economic organisations: Asia-Pacific Economic Cooperation (APEC), Association of Southeast Asian Nations (dialogue partner of ASEAN Plus Three), G-5, G-7, G-8, G-10, G-20, IMF, OECD, among others. For the full list of economic and other international organisations in which participates Japan click here. International organisation membership of Japan is also outlined here.
Free Trade Agreements
Japan is a member of Regional Comprehensive Economic Partnership (RCEP) signed on 15 November 2020. The complete and up-to-date list of Free Trade Agreements signed by Japan can be consulted here.
 

Main Partner Countries

Main Customers
(% of Exports)		 2023
United States 20.2%
China 17.6%
South Korea 6.5%
Hong Kong SAR, China 4.5%
Thailand 4.1%
See More Countries 47.0%
Main Suppliers
(% of Imports)		 2023
China 22.4%
United States 10.1%
Australia 8.6%
United Arab Emirates 4.9%
Saudi Arabia 4.6%
See More Countries 49.4%

Source: Comtrade, Latest Available Data

 

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Political Outline

Current Political Leaders
Emperor: Naruhito (since 1 May 2019); succeeded his father who abdicated on 30 April 2019
Prime Minister: Shigeru Ishiba (since 1 October 2024)
Next Election Dates
House of Representatives: October 2028
House of Councillors: July 2025
Current Political Context
Former Liberal Democratic Party (LDP) Secretary-General Shigeru Ishiba was elected leader of the ruling party and became Japan's new Prime Minister in early October 2024. He succeeded Prime Minister Fumio Kishida, who opted not to seek re-election, citing his intention to take responsibility for the LDP's fundraising scandal and to demonstrate the party's capacity for change.
The new administration’s economic policies are expected to align largely with those of its predecessor, focusing on wage increases and job market reforms. Ishiba’s own economic agenda highlights wealth redistribution and rural revitalisation as key priorities. However, Ishiba’s administration faced significant challenges after the ruling LDP-Komeito coalition lost its majority in the Lower House elections. Determined to capitalise on his high approval ratings, Ishiba dissolved the Lower House shortly after taking office, calling for a snap election, but this decision backfired. In the 27 October election, the ruling coalition secured only 215 seats, falling short of the 233-seat threshold needed for a simple majority in the 465-seat chamber—a situation not seen since 2009. As a result, the government now relies on opposition support for passing legislation, adding to political instability.
Concerning foreign policy, Ishiba has proposed strengthening Japan’s defence capabilities by creating an "Asian version of NATO" and exploring the possibility of sharing U.S. nuclear weapons in the region. These moves aim to bolster alliances with the U.S. and possibly other partners like South Korea. However, such a strategy may be perceived as anti-China. To balance this, Ishiba has called for a more diplomatic approach to stabilise Sino-Japanese relations, acknowledging the importance of their deep trade and investment ties.
Main Political Parties
The main political parties represented in the parliament include:

- The Liberal Democratic Party (LDP): centre-right, conservative, nationalist, liberal, populist
- The Constitutional Democratic Party of Japan (CDP): centre to centre-right, liberal
- Komeito (NK): centre-right, conservative, pacifist, in coalition with the LDP
- Social Democratic Party (SDP): centre-left to left-wing, social-democratic
- Japan Innovation Party (Ishin): conservative, right-wing, populist
- Democratic Party for the People (DPP): centre to centre-right
- Japanese Communist Party (JPC): left-wing to far-left, socialist; more than doubled its representation in the last election
- Reiwa Shinsengumi: left-wing, populist and progressive
- NHK Party: populist
- Okinawa Social Mass Party: local party represented in the parliament, social-democratic
- Sanseitō: right-wing, populist
- Yūshi no Kai: centre
- Conservative Party of Japan (CPJ): ultranationalist, right-wing populist.
Executive Power
The head of State is the Emperor and the role is largely ceremonial. The leader of the majority party or leader of the majority coalition in the parliament (House of Representatives) is normally appointed Prime Minister by the Emperor after being nominated by the National Diet. The Prime Minister is the Head of the Government and enjoys executive powers, which include implementation of the law and running of day-to-day affairs. The Cabinet is appointed by the Prime Minister.
Legislative Power
The legislature in Japan is bicameral. The parliament, called the National Diet, consists of the House of Councillors (the upper house) and the House of Representatives (the lower house). The House of Councillors contains 248 members, elected through a popular vote for six-year terms, with half of the membership being renewed every three years. The House of Representatives contains 465 members, elected through a popular vote for four-year terms. The Constitution of Japan states that the nation's 'highest organ of state power' is the National Diet. The executive branch of government is directly or indirectly dependent on the support of the National Diet, which is often expressed through a vote of confidence.
 

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