Economic Outline

Economic Indicators

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. Following a robust first half of 2023, economic activity in Japan tapered off during the latter part of the year, influenced by sustained high inflation and subdued global demand. The International Monetary Fund projected a growth rate of 2% for 2023, reflecting a slowdown in domestic demand and a rebound in imports. Real GDP growth is expected to decelerate to 1% in 2024 and further to 0.7% in 2025 (IMF), as the cyclical downturn compounds structural challenges, including a swiftly ageing society, diminishing labour supply, and limited innovative capacity within the economy, all of which curtail Japan's potential growth trajectory.

Japan has the highest debt-to-GDP ratio in the world: estimated at 260.1% in 2022, it declined to 255.2% last year. The government's financing capacity benefits from low bond yields, which are sustained by the central bank's monetary strategy and the broad domestic investor base. The IMF sees the debt ratio declining to 250.6% of GDP by 2025. In 2023, the fiscal deficit stood at approximately 5.7% of GDP, driven by a substantial array of measures introduced to offset the escalating cost of living. These measures included subsidies for electricity, gas, and oil, as well as cash assistance to families with children. In October 2023, a new round of fiscal stimulus was unveiled, extending energy subsidies until the close of 2023 and offering support to small and medium-sized enterprises. Additionally, the government plans to augment military spending over the next five years to achieve a target of 2% of GDP by 2027. However, fiscal support is anticipated to gradually diminish within the projected timeframe, with the fiscal deficit expected to decrease steadily to 2.6% of GDP by 2025. Following its peak at 4.3% in January 2023, headline inflation moderated to 3% by September 2023, attributed to decreased energy prices and special policy-related factors such as subsidies for gas and electricity. For the year as a whole, the IMF estimated inflation at 3.2%. Annual average inflation is expected to decline gradually to 2.9% in 2024 and further to 1.9% in 2025 (IMF), as softening domestic demand is partly offset by increasing wage pressures and the discontinuation of energy subsidies. Monetary policy is likely to remain accommodative throughout the forecast horizon. However, the increasing disparity between headline interest rates in Japan and globally may lead to additional yen depreciation and upward pressure on government bond yields.

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 2023, with a marginal decline to 2.3% expected over the forecast horizon as per the IMF).

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