Business Challenges for Japan

As Japan has struggled to emerge from its ‘two decades of stagnation’ the country continues to face a series of challenges, internal and external in rebuilding its previous position of prominence in the world’s economic affairs. Terrie Lloyd, Asian Insiders partner in Japan discusses the business challenges for Japan in this weeks Asian Insiders’ closer look at business in Asia.

The Japanese economy famously grew and grew in the 1970’s and 1980’s until it became the globe’s second largest economy in 1978, with Japanese brands and products ubiquitous throughout the western world. However from the early 1990’s the good times were over as stock and real estate prices peaked and the Tokyo stock exchange crashed. The next two decades were of much slower growth as the government looked for ways to reinvigorate the economy. Under Prime Minister Shinzo Abe, the government embarked on a range of policies including keeping interest rates artificially low, large scale quantitative easing while issuing trillions of yen in bonds and securities. Improvements to bankruptcy law, land transfer law and tax laws aided the recovery. In recent years, Japanese manufacturing has placed the country back amongst the top exporters in the world.

The slow recovery was shaken badly by the pandemic, cited by Shinzo Abe as the worst economic crisis to hit Japan since the end of World War II. Further the national Japanese debt is exceptionally high at approximately USD 9.2 trillion or 250% of Japan’s GDP. This is sustainable mainly because much of this debt is held by Japanese households via Japanese banks, which in turn use these savings to buy Japanese government bonds. 87% of government bonds are held by resident investors.

However other business challenges for Japan loom larger each year – the aging Japanese population. Currently over 26% of Japan’s population is over 65 years old, having dramatic impact across Japanese society, from the ‘abandoned homes’ phenomena to more empty schools and a decreasing ratio of working-aged people to older folk to pay for social security. In response, Japan had become a leader in the area of robotics and factory automation, while also shifting a great deal of its manufacturing offshore, and to China in particular.

Japan’s economic relationship with China has developed over the past several decades, partly in response to an undefined sense of guilt from Japan’s occupation of China in the 30’s and 40’s and partly due to China’s proximity and cheaper labour rates. However as the world flocked to Chinese manufacturing, the Chinese economy rapidly expanded, by 2011 overtaking Japan as the world’s second largest economy. Japanese productivity was by this time, inextricably bound with China while the country had become Japan’s largest trading partner. Japanese brands were as desirable in the vast Chinese market as they were in the west. More recently as China has become more muscular in the defence of its self-claimed regional periphery, tensions have arisen and these particularly evident in Japan, recognising in their own history the dangers of rising regional state-sponsored militarism.

This then is another of the business challenges for Japan, where decoupling of any magnitude remains both difficult as well as undesirable. Japanese, famously neighbourly, still sees China as Asian neighbours where maintaining warm relations is critically important, even while Japan is under significant pressure from its US allies to increase its spending on military capabilities to around 2% of its total GDP. As stated China is Japan’s largest market and further destabilisation in the region will further adversely affect the Japanese economy.

As Japan emerges from the devasting effects of the pandemic, real GDP is still below 2019 levels and recovery is sluggish. Residual demand and a flexible central bank will support the recovery but inflation is also increasing and turmoil and tensions in other markets also affect the export-oriented Japanese economy, despite being supported by a relatively weaker Yen. Meanwhile Japanese unemployment is low by international standards at 2.6% but this is due to continued workplace participation by older workers as well as more adaptive immigration policies for foreign workers.

Japan is the world’s third largest manufacturer of automobiles and while international demand in the sector remains robust, production by competing countries is rising, particularly in Asia. Other critical sectors, such as semi-conductors, face similar challenges. Furthermore, there is a general shift internationally towards the service economy.

The US, the world’s largest market, allows Japan to enjoy deep economic integration and continues to present opportunities in advanced sectors such as aerospace, defence, technology and cybersecurity. Further, Japan’s own large and sophisticated consumer economy continues to seek high quality and innovative goods and services. TAs the domestic economy adapts to the needs of an aging population, sectors including pharmaceuticals, medical technologies, customised manufacturing solutions and services from finance, travel and leisure look bright.

Recovering from the catastrophic 2011 failure at the Fukushima nuclear plant, Japan is now recommissioning its suspended nuclear capacity in response to increasing power costs and spurred by the global crisis in energy. Cheaper energy is good for business, even when it is a reversal of previous policy. Meanwhile Japan is rated 5th overall in the world in the World Bank’s Logistics Performance Index and 2nd in the infrastructure category. The fundamentals of the Japanese economy remains sound despite a high debt ratio, even if most is held domestically. Foreign investment in the stock market is up, with stocks surging recently to their highest since 1990, and suggesting that the equity market is recovering.

Japan enjoys a wide range of free trade agreements, both comprehensive and bilateral. These include being a part of the Comprehensive and Progressive Agreement for Trans Pacific Partnership (CPTPP), economic partnership agreements (EPA) with the EU and with ASEAN and a recently upgraded US-Japan Trade Agreement, as well as 16 EPA’s with countries mainly around APAC and Europe. Establishing a business relationship with Japan brings a strong set of benefits to western companies beyond the advantages of this range of international agreements, but also the participation in a vibrant marketplace of 122 million consumers. Particular opportunities exist in the fields of alternative power generation, innovative technologies, especially consumer and medical technologies, digital and IT communications technologies, video game and entertainment services (Japan is the world’s second largest market for recorded music), design services and fashion products as well as innovative food and beverage products along with high value tourism and leisure services.

Business challenges for Japan include adaptating to an aging population, allowing a more diffuse labour market, and stimulating a more vigorous regional environment, both politically and economically.

Asian Insiders offers expertise and professional support in Japan and is available to discuss business opportunities with interested clients. For a no obligation call to discuss working together in the Japanese market please contact Managing Partner Jari Hietala: jari.hietala(at) or Terrie Lloyd, Japan Partner: terrie.lloyd(at)

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