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Japan

Briefing Notes for the Launch in Tokyo, 11 May 2010

Japan in the East and North-East Asian subregion

  • The subregion spans diverse economic systems as well as the development spectrum, offering expanded opportunities for economic cooperation: from the centrally planned Democratic People’s Republic of Korea to three economies in transition from centrally planned systems, to market economies at advanced stages of development; and, at its eastern extreme, Asia’s only developed country, Japan.
  • China is the subregional growth engine as well as one of the world’s fastest-growing economies. Vertically and horizontally integrated production networks have deepened economic relations among China, Japan and the Republic of Korea.
  • The crisis and consequent plunge in import demand from Japan have impacted East and North-East Asia through trade channels. For the subregion, import demand from developed countries amount to over 25%.
  • For Japan, almost 40% of its export is destined for China, HK China, Taiwan Province of China and the Republic of Korea, while 30% of its imports comes from them (in 2009).

Impact of the crisis

  • Japan’s average pre-crisis growth was 2.1% during the period 2003 to 2007. Growth started to fall as early as the second quarter of 2008 and continued to slide, plunging by 8.9% in the first quarter of 2009 (year-on-year). For the whole of 2009, the economy shrank by 5.2%, with deterioration in almost all economic indicators.
  • Private consumption makes up almost 60% of GDP. Already weak prior to the crisis, it remained weak in 2009 along with wage income and employment. Private investment contracted at an unprecedented pace. Gross fixed investment plunged by 14.6% in 2009.
  • Year-on-year decreases in merchandise trade in Japan reached over 30%. Japanese import dropped around 15% while export plunged over 25% in 2009.
  • China in 2009 became the most important Japanese trading partner, overtaking the United States. China’s share in total Japanese export was 19% in 2009, compared to 16% of the US. During 2009, Japan’s export to US plunged over 30% while that to China declined by 10%.
  • Appreciation of Japanese yen added further pressure on exporters. During 2009 the Japanese yen increased by over 20% from its low in mid-2008.
  • Lack of inflationary pressure in the subregion going into the crisis permitted accommodative monetary policies as part of stimulus measures. For Japan, however, it brought back deflationary pressures that had plagued the Japanese economy for more than a decade. While consumer price inflation hovered around 0%, producer price inflation swung from 4.5% in 2008 to an estimated -5.2% in 2009, reflecting the fluctuation of commodity prices, in particular oil prices, during the period.

Policy response

  • During 2008 the Bank of Japan (BoJ) explored various unconventional measures to ensure liquidity for the corporate sector, in particular small and medium enterprises (SMEs). The policy interest rate was already lowered from 0.5% to 0.1% by the end of 2008. BoJ maintained the loose monetary policy as the recession brought back the renewed concern over deflation.
  • Japan launched a series of economic stimulus packages including 15.4 trillion yen2 policy package to address economic crisis in April 2009 and 7.2 trillion yen economic package in December 2009. That added to the already record high public debt, which could now grow as high as 200% of GDP in 2010.
  • East and North-East Asian countries were notable among other parts of the ESCAP region for taking the lead in policy cooperation to combat impacts of the crisis. Cooperation moved to new heights among the major economies of Japan, China, the Republic of Korea played a leading role in 2009 in the financial response of Asia and the Pacific to the crisis through the multilateralization of the ASEAN+3 Chiang Mai Initiative.

Outlook

  • Even though Japan should benefit from a revival in external demand and achieve positive growth of 1.3% in 2010, domestic demand remains weak and business investment has yet to sustain recovery. There is risk of further discouragement in domestic consumption depending on how the labour market reacts to the evolving economic conditions.