Country briefing note <download pdf file>
Turbulent economic performance in 2012 but recovery in sight
- Following a contraction of the economy by 0.6% in 2011, GDP increased by 2% in 2012. Growth picked up strongly in the first quarter, driven by government reconstruction expenditures related to the earthquake and tsunami of March 2011 and export sector's recovery from the effects of severe flooding in Thailand in late 2011. In the second half of 2012 however, Japan entered into a technical recession of two consecutive quarters of contraction, underscoring the difficulties facing the economy as a result of weak exports and softening domestic demand.
- Capital spending decelerated and net exports made a negative contribution to growth in the second half of 2012, when Sino-Japanese tensions also took a toll via different channels, including declines in export volume, in the sales of China-based subsidiaries of Japanese firms and in the number of tourists from China visiting Japan. An additional factor that contributed to a record high trade deficit was increased energy imports as most nuclear reactors remained closed after the disaster in 2011.
- By the end of 2012, the economy returned to growth with the help of private consumption and public investment as market sentiment significantly improved due to the government's strong commitment to combat deflation and foster growth.
- As the global economy makes a hesitant and uneven recovery in 2013, economic activity in Japan is expected to pick up and growth is projected to increase by 2.5%.
Aggressive easing of monetary policy to combat deflation
- While consumer prices rose during the first half of 2012, deflation re-emerged in the remainder of the year. For the year as a whole, the consumer price index remained unchanged at zero inflation in 2012, compared to 0.3% deflation in 2011.
- To combat deflationary pressures, the Bank of Japan injected capital into the markets through purchasing assets on five occasions in 2012 and introduced a new bank lending facility to provide banks with collateralized loans at an overnight call rate of 0.1%.
- In early 2013, in a departure from previous practice, the Bank of Japan decided to double the inflation target to 2% for fiscal year 2013/2014.
Currency depreciates and outward FDI rises
- The Japanese Yen started to drop against the dollar in response to the rigorous expansionary monetary stance taken by the Government of Japan. Since the announcement of the Government's commitment to reach a binding inflation target of 2%, the currency depreciated by over 13% against the dollar in three months.
- Japanese deals for companies overseas got bigger and bolder, with multibillion dollar purchases in telecommunications and advertising signaling a shift to service-based industries. Also, Japanese firms grappling with a strong yen and disruptions in the supply chain caused by natural disasters were active in building manufacturing capacity overseas. Japan's outward FDI increased by around 10% in 2012 year-on-year.
Sizeable fiscal stimulus package despite growing government debt
- In July 2012, the Government released the draft of its “Comprehensive Strategy for the Rebirth of Japan”, a medium- to long-term growth strategy that would be in effect through fiscal year 2020. Under the strategy, 38 policies in 11 fields are outlined that are aimed at creating a new market centered on the environment which would be worth more than 50 trillion yen and would create 1.4 million jobs. Additionally, small and large stimulus packages were announced, including one in January 2013.
Future outlook and policy challenges
- The slowdown in China, coupled with rising geopolitical tension in the subregion, is putting pressure on Japanese exporters. Exports to China , Japan's top export market, fell by 6.1% in the first half of the year, marking the first drop since 2009.
- The development of the service sector and the gradual transition to an economic model where domestic demand replaces external demand as the main source of growth are important to mitigate the trend of social exclusion. Relative poverty in Japan is sixth highest in the OECD member countries and women's participation in the labour force remains low at around 50%.