“Localization challenge”

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Country Report

Japan

Generated on November 27th 2018

Economist Intelligence Unit 20 Cabot Square London E14 4QW United Kingdom

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The Economist Intelligence Unit

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ISSN 2047-508X

Symbols for tables

"0 or 0.0" means nil or negligible;"n/a" means not available; "-" means not applicable

Japan

Summary Briefing sheet

Outlook for 2019-23 Political stability

Election watch

International relations

Policy trends

Fiscal policy

Monetary policy

International assumptions

Economic growth

Inflation

Exchange rates

External sector

Forecast summary

Quarterly forecasts

Data and charts Annual data and forecast

Quarterly data

Monthly data

Annual trends charts

Quarterly trends charts

Monthly trends charts

Comparative economic indicators

Summary Basic data

Political structure

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Japan 1

Country Report December 2018 www.eiu.com © Economist Intelligence Unit Limited 2018

Briefing sheet Editor: John Marrett

Forecast Closing Date: November 15, 2018

Political and economic outlook

The Economist Intelligence Unit expects the Liberal Democratic Party government to serve a full term, until 2021. The prime minister, Shinzo Abe, is set to become Japan's longest-serving prime minister, assuming that he completes his full term. Assuming that approval ratings for the government remain high, we expect Mr Abe to push ahead with his timetable for constitutional change. He will win the necessary approval from parliament, which will pave the way for a referendum by 2020. The outcome of the referendum will depend on the wording and specifics of proposed changes, which we expect to be finalised in 2020, but we are confident that it will aim to legitimise unambiguously the constitutional status of the Self-Defence Forces. North Korea's diplomatic engagement with the US and South Korea has left Japan largely sidelined with regard to the rapidly changing security situation in East Asia. This trend will continue and force Japan to step up its co-ordination efforts with the US. We expect the Bank of Japan (BOJ, the central bank) to make preparations to "normalise" its policy settings from 2021, when it is likely to announce a plan to taper its asset purchases. However, the policy interest rate will not be raised above zero until 2023. We forecast that real GDP will grow by an average of 1% a year in 2019-23. This steady performance will be interrupted temporarily in 2020 by the impact of a consumption tax increase in October 2019 and a slowdown in the US economy in that year.

Key indicators 2018a 2019b 2020b 2021b 2022b 2023b

Real GDP growth (%) 1.1 1.4 0.5 1.2 1.0 1.0

Consumer price inflation (av; %) 1.1 1.9 2.3 1.3 1.2 1.4

Government balance (% of GDP) -3.7 -3.9 -3.1 -3.6 -3.5 -3.6

Current-account balance (% of GDP) 4.2 4.1 4.5 4.4 4.0 4.0

Money market rate (av; %) 0.0 0.1 0.1 0.2 0.2 0.3

Unemployment rate (%) 2.5 2.2 2.2 2.1 2.1 1.9

Exchange rate ¥:US$ (av) 110.2 111.5 108.6 104.9 100.5 96.1 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts.

Japan 2

Country Report December 2018 www.eiu.com © Economist Intelligence Unit Limited 2018

Key changes since October 23rd

Preliminary national-accounts data for the third quarter of 2018 showed slower growth in exports of goods and services than we had expected. Consequently, we have revised down our annual export growth estimate for 2018 from 5.1% to 4.2%. As a result of the downward revision to export growth in 2018, our real GDP estimate for the year as a whole has decreased slightly, from 1.2% to 1.1%. We are still forecasting headline growth to accelerate to 1.4% in 2019.

The month ahead

November 20th—Consumer price data (October): The latest data will indicate whether a weakening in the yen's value and knock-on effects from natural disasters are continuing to have an impact on overall prices, as was the case in August-September. November 26th—External trade data (October): The release will give an indication of whether the slump in goods and services exports (on a national-accounts basis) in July-September is likely to continue into October-December.

Major risks to our forecast Scenarios, Q3 2018 Probability Impact Intensity

Japan gets caught up in a global trade war initiated by the US High Very

high 20

Foreign firms fail to overcome informal barriers High High 16

A large earthquake hits the capital, Tokyo Moderate Very

high 15

The second increase in the consumption tax, planned for October 2019, is

postponed Moderate

Very

high 15

Another fall in global commodity prices results in softer increases in prices Moderate High 12

Note. Scenarios and scores are taken from our Risk Briefing product. Risk scenarios are potential

developments that might substantially change the business operating environment over the coming two

years. Risk intensity is a product of probability and impact, on a 25-point scale. Source: The Economist Intelligence Unit.

Japan 3

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Outlook for 2019-23

Political stability The Economist Intelligence Unit believes that the Liberal Democratic Party (LDP) and its coalition partner, the Komeito party, will maintain their dominant position in the Diet (parliament) in 2019-23. This bodes well for policymaking. The prime minister, Shinzo Abe, retained the presidency of his party, the LDP, in a leadership election held in September 2018. We expect him to serve out his third three-year term, which ends in August 2021, in full.

In 2019-20 we believe that Mr Abe will pursue the outstanding goals of his legislative agenda. These include reforming the social security system and amending the constitution. We expect proposals for constitutional change to be adopted after the abdication of Emperor Akihito in April 2019. A referendum on the issue is unlikely to be held before the end of next year. This timetable would leave sufficient room to make the necessary legislative amendments by 2020, meeting an earlier deadline set by Mr Abe. However, tough obstacles remain, not least the differences of opinion within the ruling coalition and among its allies in both houses of parliament. Even if the government manages to arrive at a consensus, the final obstacle would be to win majority support from the public. Most voters are wary of change and see the current constitution as the bedrock of Japan's post-war peace and democracy. Given these sensitivities, Mr Abe is likely to tread carefully. He will keep the existing two clauses pertaining to Article 9, which refer to Japan's renunciation of war as a means of solving international conflict and its possession of armed forces. However, he will probably seek to add a third clause that would unambiguously legitimise the constitutional status of the Self-Defence Forces.

The opposition Constitutional Democratic Party (CDP) will struggle to present a credible alternative to the LDP. The CDP is unlikely to improve on its parliamentary representation at the next election, but it will present a more united front than the previous main opposition party, the Democratic Party. The CDP is likely to form an alliance with smaller left-leaning political parties and gain the support of independents, but it will still not be able to wrest power from the LDP-led coalition. We therefore believe that the coalition's dominance in both houses of parliament will not be threatened during the forecast period.

Election watch The next poll for the House of Councillors (the upper house of parliament) is due in July 2019, when half the seats in the chamber are up for re-election. The LDP-led coalition currently holds 147 out of 242 seats in the upper house and, with the support of Komeito and minor parties, commands a two-thirds majority. There is a risk that shifting political alliances might erode support for the government from the minor parties, but we expect the current arrangements to hold until the upper-house election. Assuming that the LDP's approval ratings do not change significantly, we expect it and Komeito to win a simple majority at the next upper-house election. In addition, unified local elections are also due in the first half of 2019, with gubernatorial polls scheduled to be held in as many as 20 prefectures. Mayoral elections are also due in several cities, including Osaka.

The next poll for the House of Representatives (the lower house) is due in 2021; we expect the LDP to retain power, winning a simple majority. However, Mr Abe has had a penchant for calling snap elections; once in 2014 and again in 2017. If approval ratings for the LDP increase in 2019, he may call a snap lower-house election next year, soon after polls for the House of Councillors in July, on the pretext of amending the constitution. This would further extend the LDP's rule for another four years, until 2023.

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International relations Relations with the US, Japan's main security ally and its second-largest trade partner, will remain close. However, the aggressive approach to foreign policy adopted by the US president, Donald Trump, will test long-established bilateral ties. The US will maintain strong diplomatic pressure on its ally. For its part, in September 2018 Japan agreed to negotiate a goods trade agreement with the US, as it allows Japan to avoid tariffs on its automotive sector, at least in the short term. However, Japan will resist a free-trade agreement that would comprehensively cover services as it continues to pursue a multilateral trade agenda.

On the security front, Japan is wary of North Korea's recent outreach to the US. Japan was a strong supporter of Mr Trump's "maximum pressure" strategy against North Korea. In the light of the US's rapprochement efforts, Japan will seek to step up its direct engagement with North Korea, as well as with other regional actors such as China, South Korea and Russia. The president of South Korea, Moon Jae-in, also supports the establishment of diplomatic contact between North Korea and Japan for ensuring peace on the Korean peninsula. However, the unresolved issue of past abductions of Japanese citizens by North Korea is likely to impair progress in 2019-23.

Japan's relationship with China will remain strained in 2019-23, but the two sides have a mutual interest in improving economic ties. The countries have opened talks on their dispute over the uninhabited Senkaku Islands (known as the Diaoyu Islands in China) in the East China Sea, which are administered by Japan but claimed by both countries. These could yield agreements designed to reduce the risks stemming from potential maritime clashes in the area, but would not resolve the dispute over ownership, which will not be settled in 2019-23. However, both countries, along with South Korea, will take part in trilateral trade talks throughout 2019-23, although these are unlikely to reach a meaningful conclusion within the forecast period.

We expect the government to maintain cordial diplomatic relations with South Korea. However, a substantial improvement in relations—outside the realm of national security—between Japan and South Korea seems unlikely, given wary public sentiment in South Korea over the issue of so- called comfort women (known as ianfu in Japanese, who were mostly from South Korea and were coerced into prostitution by Japan's military during the second world war).

Elsewhere, Japan has been expanding its influence in the Mekong region by funding infrastructure development. More than 150 infrastructure projects in the region will form part of the "Tokyo Strategy 2018" adopted at the tenth Mekong-Japan summit. In addition, Japan will host African leaders in August 2019 for the seventh Tokyo International Conference on African Development. The Japanese government plans to extend its diplomatic outreach to African countries as part of the conference by focusing on development initiatives.

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Policy trends The government will continue to pursue an economic revival agenda that focuses on flexible fiscal policies, as well as structural reforms. This will be set against a background of accommodative monetary policy that will remain in place until 2021. This policy mix has contributed to a mild recovery that has spanned six years to 2017. In June 2018 the authorities finalised the sixth instalment of the annual economic policy package. A "human resources development revolution" has been accorded a high priority and is expected to help to avert Japan's "demographic cliff" scenario, in which the proportion of people aged 50 and over make up more than half of the country's population by the mid-2020s. Meanwhile, the "productivity revolution" will be pushed into high gear in a bid to meet the goal of boosting nominal GDP to ¥600trn (US$5.4trn) by fiscal year 2020/21 (April-March) by promoting the adoption and development of new productive technologies. This is part of Japan's goal of realising a "super-smart society", or "Society 5.0".

The lofty ambitions of achieving sustainable economic growth and reducing the size of its fiscal deficit will come under mounting pressure from Japan's ageing population. This was illustrated by the postponement of the target year for reaching a surplus in the combined primary budget balance for the central and local governments, from 2020/21 to 2025/26. To this end, we expect the government to introduce several social security reforms, which will help to raise the labour participation rate, especially for women. Trade liberalisation is also a key goal for the government. This is shown by Japan's swift ratification of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, a mega-regional trade pact, and the Economic Partnership Agreement with the EU. However, the effects of the two trade agreements are not expected to be felt until the 2020s.

Fiscal policy The government will struggle to balance the public finances in 2019-23. We expect the budget deficit to shrink to the equivalent of 3.5% of GDP on average in 2019-23, from 3.9% in 2014-18. Our forecasts assume that the government will proceed with a planned rise in the consumption tax rate, from 8% currently to 10% in October 2019. Nonetheless, the tax increase in itself will not be sufficient to close the gap on the primary fiscal account (which excludes interest payments), let alone erase the budget deficit in the latter part of the forecast period. In addition, part of the rise in tax revenue has already been earmarked for social services, such as expanding childcare support. The cut in corporate taxes is likely to be delayed further before the budget is balanced. Our forecasts are consistent with the government's projections, which envisage a surplus on the primary fiscal account towards the end of the next decade.

One reason for Japan's sizeable fiscal shortfalls is the government's tendency to supplement the annual budget, and we expect this trend to continue in 2019-23. A substantial proportion of supplementary budget spending is often committed to ongoing projects. However, additional expenditure is also targeted towards reconstruction efforts in the wake of natural disasters, such as the recent ones seen in Hokkaido and Osaka prefectures.

The government's pledge to increase the consumption tax in October 2019 should not be interpreted as the start of fiscal tightening, nor is it part of Mr Abe's stimulus agenda. This measure is primarily aimed at stabilising the public debt, an objective that gained cross-party support under the previous Democratic Party of Japan government (2009-12). Although the ratio of public debt to GDP will remain high in 2019-23, the government is unlikely to sanction a further increase in the consumption tax or raise income taxes for fear of denting consumer sentiment.

Japan 6

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Monetary policy The Bank of Japan (BOJ, the central bank) will continue with its quantitative easing (QE) programme and ultra-low interest rates until 2021. We believe that the BOJ will accord a high priority to supporting growth amid rising trade protectionism and that it will withstand calls from the banking sector to normalise policy before 2021. The negative policy interest rate, which has been in place since 2016, has contributed to an erosion of banking sector profits. In addition, financial intermediaries have expressed concern over bond-market liquidity as the balance sheet of the BOJ continues to swell. The BOJ currently owns 44.6% of medium- to long-dated Japanese government bonds.

We expect the BOJ to alter its current policy settings gradually from 2021, by first removing its targeting of the ten-year government bond yield to around zero, followed by a change in the policy interest rate from -0.1% to zero. It will then begin to rein in its bond buying (or "taper"), with targeted purchases under the programme coming to an end 12-18 months later. As has been the case in the past when the central bank has moved away from QE, the BOJ is expected to leave the policy interest rate at zero for some time. We do not expect the BOJ to sanction an increase until 2023 at the earliest. Despite its failure to engineer a sustainable increase in consumer prices to 2%, it will retain a 2% stability target throughout 2019-23.

International assumptions 2018 2019 2020 2021 2022 2023

Economic growth (%)

US GDP 2.9 2.2 1.3 1.7 2.0 1.9

OECD GDP 2.3 2.0 1.5 1.8 1.9 1.9

EU28 GDP 2.0 1.9 1.7 1.8 1.8 1.7

World GDP 3.0 2.7 2.5 2.7 2.8 2.7

World trade 4.0 3.4 2.8 3.9 3.7 3.9

Inflation indicators (% unless otherwise indicated)

US CPI 2.6 2.4 1.6 1.8 1.7 1.8

OECD CPI 2.5 2.5 2.0 2.0 2.0 2.0

EU28 CPI 1.9 1.9 1.8 1.8 1.9 1.9

Manufactures (measured in US$) 6.3 3.6 3.0 2.4 3.6 3.0

Oil (Brent; US$/b) 73.2 75.5 70.3 74.8 77.4 76.1

Non-oil commodities (measured in US$) 2.4 0.0 2.6 1.9 1.5 0.6

Financial variables

US$ 3-month commercial paper rate (av; %) 2.1 2.9 2.5 2.6 2.9 3.2

€ 3­month interbank rate (av; %) -0.3 -0.1 0.4 0.9 1.4 1.6 US$:€ (av) 1.18 1.19 1.21 1.21 1.24 1.24 ¥:US$ (av) 110.2 111.5 108.6 104.9 100.5 96.1

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Economic growth The government's economic revival agenda, "Abenomics", has contributed to a mild economic recovery that has spanned six years to 2017. We expect real GDP to expand by an annual average of 1% in 2019-23. We have revised down our estimate for growth in goods and services exports in 2018, following more muted third-quarter data than we had expected, but significant downside risks to our GDP forecasts remain. Indeed, investment growth prospects continue to be overshadowed by rising tensions in global commerce, fuelled by disruptive US trade policy. Growth will, nonetheless, be underpinned by continued support from a fairly accommodative fiscal policy stance.

Our economic growth forecasts assume that the government will proceed with the scheduled rise in the consumption tax rate in October 2019. We expect private consumption to pick up in that year in anticipation of the tax change. However, it will then contract significantly in 2020 as consumers adjust their spending behaviour in response to the tax increase, resulting in a marked slowdown in real GDP growth to just 0.5%. The hosting of the Olympic Games in the capital, Tokyo, will help to support growth in 2020, but the economy will also face headwinds from an economic slowdown in the US in that year. Expected rebounds in Japan's economy and in the US will see Japan's real GDP growth accelerate to 1.1% a year on average in 2021-23.

Economic growth % 2018a 2019b 2020b 2021b 2022b 2023b

GDP 1.1 1.4 0.5 1.2 1.0 1.0

Private consumption 0.5 1.1 -0.5 0.4 0.6 0.7

Government consumption 0.5 0.7 0.8 0.8 0.7 0.7

Gross fixed investment 1.7 1.2 1.0 1.6 1.7 1.7

Exports of goods & services 4.2 5.1 5.2 6.2 5.7 5.6

Imports of goods & services 3.2 3.5 2.6 4.4 5.6 5.4

Domestic demand 0.9 1.1 0.0 0.8 1.0 0.9

Agriculture 0.7 0.8 -1.0 0.2 0.2 0.2

Industry -0.5 1.3 0.5 1.5 1.2 1.2

Services 1.8 1.4 0.5 1.0 1.0 0.9 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts.

Inflation We forecast that consumer prices will increase by an average of 1.6% annually in 2019-23. With the stimulatory effects of the BOJ's loose monetary policy losing their edge, the expected rise in the general price level will mainly reflect the impact of a modest recovery in global oil prices. In addition, we expect wage growth to support inflation, although the former is unlikely to exceed 3%.

Consumer price pressure will build unusually rapidly in the final quarter of 2019 and into 2020, owing to an increase in the consumption tax in late 2019. Annual inflation will return to a moderate annual average of 1.3% in 2021-23. Given the yen's appreciatory trend against the US dollar, we therefore do not expect annual core consumer price inflation to reach the BOJ's price stability target of 2% in any year of the forecast period except for 2020, owing to the effect of the consumption tax increase.

Exchange rates We expect the yen to depreciate by 1.2% against the US dollar in 2019, averaging ¥111.54:US$1. Sustained monetary policy divergence between the US and Japan during that year will keep the yen:US dollar exchange rate fairly weak. The expected slowdown in the US economy in 2020, which we believe will prompt the Federal Reserve (the US central bank) to embark on a policy loosening cycle, will reinvigorate an upward trajectory of the yen's value against the US dollar in that year. We expect the currency to strengthen further in 2021-23 as the BOJ begins to remove stimulatory measures and starts to unwind its QE programme gradually.

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External sector Japan will continue to post current-account surpluses, equivalent to 4.2% of GDP on average, in 2019-23. We expect the trade account to record surpluses throughout the forecast period, partly reflecting the impact of the restart of more nuclear power plants, which will help to reduce the import bill for fossil fuels. However, US-led trade tensions will lead to a decline in overall trading activity, with a fall in both exports and imports of goods. Meanwhile, the services account will record annual surpluses consistently in 2019-23, in contrast with the preceding five-year period, owing to increasing tourist arrivals, especially in 2020 amid the Olympic Games. A substantial positive balance will be maintained on the primary income account in the forecast period, owing to the country’s large stock of overseas direct and portfolio investment.

Forecast summary Forecast summary (% unless otherwise indicated)

2018a 2019b 2020b 2021b 2022b 2023b

Real GDP growth 1.1 1.4 0.5 1.2 1.0 1.0

Industrial production growth 0.4 3.4 3.8 4.4 4.5 4.6

Gross fixed investment growth 1.7 1.2 1.0 1.6 1.7 1.7

Unemployment rate (av) 2.5 2.2 2.2 2.1 2.1 1.9

Consumer price inflation (av) 1.1 1.9 2.3 1.3 1.2 1.4

Consumer price inflation (end-period) 1.2 2.1 1.8 1.3 1.3 1.4

Short-term interbank rate 1.5 1.5 1.5 1.5 1.5 1.5

Government balance (% of GDP) -3.7 -3.9 -3.1 -3.6 -3.5 -3.6

Exports of goods fob (US$ bn) 727.3 756.2 809.6 882.4 975.6 1,090.0

Imports of goods fob (US$ bn) 689.4 723.9 776.9 848.0 940.3 1,042.5

Current-account balance (US$ bn) 211.1 210.9 240.7 251.8 247.5 263.2

Current-account balance (% of GDP) 4.2 4.1 4.5 4.4 4.0 4.0

Exchange rate ¥:US$ (av) 110.2 111.5 108.6 104.9 100.5 96.1 Exchange rate ¥:US$ (end­period) 111.9 111.5 107.9 103.2 98.5 95.1 Exchange rate ¥:€ (av) 130.4 132.5 131.6 126.6 124.3 118.9 Exchange rate ¥:€ (end­period) 129.2 135.5 129.5 126.4 122.6 118.4 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts.

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Quarterly forecasts Quarterly forecasts

2018 2019 2020

1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr

GDP

% change, quarter on

quarter -0.3 0.8 -0.3 1.5 -0.1 0.2 0.3 0.0 0.2 -0.1 0.2 0.4

% change, year on

year 1.1 1.4 0.4 1.7 1.9 1.3 1.9 0.4 0.7 0.4 0.3 0.7

Private

consumption

% change, quarter on

quarter -0.2 0.7 -0.1 0.9 0.0 0.2 0.4 0.1 -0.2 -0.6 -0.2 -0.1

% change, year on

year 0.1 0.1 0.6 1.2 1.5 1.0 1.5 0.6 0.4 -0.4 -1.0 -1.1

Government

consumption

% change, quarter on

quarter 0.0 0.2 0.2 0.1 -1.0 1.1 0.7 1.1 -0.5 -0.1 -0.1 0.0

% change, year on

year 0.5 0.4 0.5 0.5 -0.5 0.4 1.0 1.9 2.4 1.1 0.3 -0.7

Gross fixed

investment

% change, quarter on

quarter 0.1 1.8 -1.3 2.3 -0.2 0.0 0.1 -0.2 0.5 0.2 0.5 0.7

% change, year on

year 1.6 2.4 0.4 2.8 2.4 0.6 2.1 -0.3 0.4 0.6 1.0 1.9

Exports of goods &

services

% change, quarter on

quarter 0.5 0.3 -1.8 6.0 0.4 0.7 0.8 0.5 1.7 1.4 1.7 1.9

% change, year on

year 5.1 5.7 1.1 4.9 4.8 5.2 8.0 2.5 3.8 4.6 5.5 7.0

Imports of goods &

services

% change, quarter on

quarter 0.1 1.0 -1.4 3.0 0.5 0.7 0.9 0.6 0.7 0.3 0.7 0.9

% change, year on

year 3.9 3.3 2.8 2.7 3.1 2.8 5.2 2.8 2.9 2.5 2.3 2.6

Domestic demand

% change, quarter on

quarter -0.3 0.9 0.4 -0.3 0.7 0.7 -0.1 -0.7 0.8 -0.1 -0.3 -0.3

% change, year on

year 1.1 1.4 0.4 1.7 1.9 1.3 1.9 0.4 0.7 0.4 0.3 0.7

Consumer prices

% change, quarter on

quarter 0.3 -0.3 0.5 0.6 0.4 0.4 0.5 1.2 0.5 0.3 0.4 0.3

% change, year on

year 1.3 0.6 1.1 1.2 1.2 2.0 1.9 2.5 2.6 2.5 2.4 1.5

Producer prices

% change, quarter on

quarter 0.5 0.7 0.9 0.8 0.5 0.5 0.6 1.0 0.7 0.8 1.0 0.6

% change, year on

year 2.4 2.5 3.0 2.8 2.8 2.6 2.3 2.5 2.8 3.1 3.5 3.2

Exchange rate ¥:US$ Average 108.30109.14111.54111.65111.63111.33111.94111.26109.77108.91108.07107.53

End-period 106.20110.71113.48111.90111.48111.63111.60111.50109.34108.49107.80107.90

Interest rates (%;

av)

Money market rate 0.1 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.2 0.2

Long-term bond yield 0.1 0.0 0.1 0.1 0.0 0.0 0.1 0.0 0.1 0.0 0.1 0.1

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Data and charts

Annual data and forecast 2014a 2015a 2016a 2017a 2018b 2019c 2020c

GDP

Nominal GDP (US$ bn) 4,854.5 4,395.9 4,951.7 4,873.9 5,073.9 5,130.5 5,393.8

Nominal GDP (¥ trn) 514 532 539 547 559 572 586 Real GDP growth (%) 0.4 1.4 1.0 1.7 1.1 1.4 0.5

Expenditure on GDP (% real change)

Private consumption -0.9 0.0 0.1 1.0 0.5 1.1 -0.5

Government consumption 0.5 1.5 1.3 0.4 0.5 0.7 0.8

Gross fixed investment 3.0 1.7 1.1 2.5 1.7 1.2 1.0

Exports of goods & services 9.3 2.9 1.7 6.7 4.2 5.1 5.2

Imports of goods & services 8.3 0.8 -1.6 3.5 3.2 3.5 2.6

Origin of GDP (% real change)

Agriculture -3.1 -4.8 -13.1 0.9b 0.7 0.8 -1.0

Industry 2.7 2.6 3.2 1.4b -0.5 1.3 0.5

Services -0.4 1.0 0.2 1.9b 1.8 1.4 0.5

Population and income

Population (m) 128.2 128.0 127.7 127.5 127.2 126.9 126.5

GDP per head (US$ at PPP) 38,908 40,452 42,039 43,046 44,191 45,727 47,191

Recorded unemployment (av; %) 3.6 3.4 3.1 2.8 2.5 2.2 2.2

Fiscal indicators (% of GDP)

General government budget revenue 34.4 35.3 35.2 35.2 34.6 34.7 35.5

General government budget expenditure 39.7 38.8 38.7 38.7 38.4 38.6 38.6

General government budget balance -5.4 -3.6 -3.4 -3.5 -3.7 -3.9 -3.1

Public debt 218.3 216.6 222.4 224.1 225.6 226.8 227.3

Prices and financial indicators

Exchange rate ¥:US$ (end­period) 119.9 120.3 116.8 112.7 111.9 111.5 107.9 Exchange rate ¥:€ (end­period) 145.5 130.9 123.1 135.1 129.2 135.5 129.5 Consumer prices (end-period; % change) 2.4 0.1 0.3 1.1 1.2 2.1 1.8

Producer prices (av; % change) 3.2 -2.3 -3.5 2.3 2.7 2.6 3.2

Stock of money M1 (% change) 4.7 5.1 7.0 7.9 5.9 4.8 4.8

Stock of money M2 (% change) 3.4 3.6 3.4 4.0 2.8 3.2 3.2

Money market interest rate (av; %) 0.16 0.19 0.13 0.08 0.04 0.07 0.14

Current account (US$ bn)

Trade balance -99.9 -7.4 51.1 44.2 37.9 32.3 32.8

Goods: exports fob 699.1 622.0 635.9 688.9 727.3 756.2 809.6

Goods: imports fob -799.0 -629.4 -584.7 -644.7 -689.4 -723.9 -776.9

Services balance -28.8 -15.9 -10.8 -6.6 3.0 7.1 16.4

Primary income balance 184.0 175.9 173.3 177.0 188.3 189.2 209.7

Secondary income balance -19.1 -16.4 -19.6 -18.8 -18.1 -17.7 -18.1

Current-account balance 36.4 136.4 194.0 195.8 211.1 210.9 240.7

International reserves (US$ bn)

Total international reserves 1,261 1,233 1,217 1,264 – – – a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. Source: IMF, International Financial Statistics.

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Quarterly data 2016 2017 2018

4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr

Outputa

GDP at chained 2011 prices (¥ trn) 524.7 527.6 530.2 533.9 535.0 533.5 537.5 n/a Real GDP (% change, quarter on quarter) 0.2 0.6 0.5 0.7 0.2 -0.3 0.8 n/a

Real GDP (% change, year on year) 1.6 1.4 1.5 2.0 1.9 1.1 1.4 n/a

Industrial production index (2010=100) 100.5 101.0 99.6 102.1 105.1 103.4 101.5 101.9

Industrial production index (% change,

year on year) 2.1 3.5 5.7 3.9 4.6 2.3 1.9 -0.2

Employment, wages & prices

Employed (m) 64.96 64.43 65.43 65.77 65.58 65.87 66.85 66.86

Unemployed (‘000) 1,950 1,910 1,997 1,900 1,777 1,660 1,687 1,680

Unemployment rate (% of labour force)a 3.1 2.9 2.9 2.8 2.7 2.5 2.4 2.4

Real gross earnings in manufacturing

(2010=100)a 99.5 n/a n/a n/a n/a n/a n/a n/a

Consumer prices (2015=100)a 100.3 99.9 100.3 100.3 100.9 101.2 100.9 101.4

Consumer prices (% change, year on year)a 0.3 0.3 0.4 0.6 0.6 1.3 0.6 1.1

Corporate goods prices (2010=100)a 96.5 97.9 98.5 98.8 99.7 100.3 100.9 101.8

Financial indicators

Exchange rate ¥:US$ (av) 109.5 113.6 111.1 111.0 112.9 108.3 109.1 111.5 Exchange rate ¥:US$ (end­period) 116.8 111.4 112.4 112.6 112.7 106.2 110.7 113.5 M1 (period average; ¥ trn) 680.9 694.8 705.1 717.8 730.0 739.3 749.6 762.7 M1 (% change, year on year) 8.7 9.3 7.7 7.5 7.2 6.4 6.3 6.3

M2 (period average; ¥ trn) 950.3 960.7 969.5 978.7 987.0 991.7 1000.0 1006.8 M2 (% change, year on year) 3.7 4.1 3.9 4.0 3.9 3.2 3.1 2.9

Discount rate (end-period; %) 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30

Call money rate (end-period; %) -0.04 -0.04 -0.05 -0.05 -0.04 -0.05 -0.06 -0.07

3-month CDs rate (av; %)b 0.01 0.01 0.01 0.01 0.01 0.01 0.01 n/a

Nikkei 225 stock average (¥) 19,114 18,909 20,033 20,356 22,765 21,454 22,305 24,120

Sectoral trendsa

Mining & manufacturing production (2011=100) 99.8 100.0 101.8 102.3 103.9 102.5 103.8 n/a

Investment goods production (2011=100) 105.3 104.2 107.3 108.3 111.0 108.2 109.8 n/a

Consumer goods production (2011=100) 96.1 96.1 97.6 97.5 98.1 97.4 99.1 n/a

Producer goods production (2011=100) 99.0 99.8 101.1 101.9 103.4 102.4 103.2 n/a

Machinery orders, net new, incl ships (¥ bn)c 7,257 6,687 6,799 7,231 7,519 7,121 7,309 n/a

Total construction starts (m sq metres) 33.3 34.1 33.8 33.5 33.3 32.2 32.4 n/a

Residential construction starts (m sq metres) 19.3 20.0 19.9 19.1 18.9 18.2 19.0 n/a

Retail sales (2010=100) 100.7 n/a n/a n/a n/a n/a n/a n/a

Foreign trade (¥ bn) Exports fob 18,506 18,996 18,790 19,584 20,917 19,932 20,199 n/a

Imports cif -

17,242

-

18,693

-

18,083

-

18,427

-

20,177

-

20,087

-

19,443 n/a

Trade balance 1,264 303 707 1,157 740 -155 756 n/a

Foreign payments (US$ bn)d

Merchandise trade balance fob-fob 16.06 9.57 8.62 15.84 10.21 6.69 9.77 0.92

Services balance -5.44 0.22 -2.59 -2.39 -1.75 1.96 -5.61 -1.99

Primary income balance 30.29 48.71 39.01 54.76 34.49 51.78 45.31 56.83

Net transfer payments -4.06 -5.48 -3.64 -5.11 -4.63 -6.12 -3.87 -4.93

Current-account balance 36.85 53.02 41.40 63.11 38.32 54.32 45.61 50.83

Reserves excl gold (end-period) 1,188.31,199.61,219.21,234.61,232.21,235.61,227.81,230.2 a Seasonally adjusted. b Certificates of deposit. c 280 firms. d Bank of Japan. Sources: OECD, Main Economic Indicators; Statistics Bureau, Government of Japan, Monthly Statistics of Japan; IMF,

International Financial Statistics.

Monthly data Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Exchange rate ¥:US$ (av) 2016 118.2 114.6 112.9 109.6 108.9 105.4 104.2 101.2 101.8 103.9 108.4 116.0

2017 114.9 112.9 112.9 110.1 112.2 110.9 112.4 109.8 110.8 112.9 112.8 112.9

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2018 110.9 108.0 106.1 107.7 109.7 110.1 111.5 111.0 112.1 112.7 n/a n/a

Exchange rate ¥:US$ (end­period) 2016 121.1 112.9 112.4 106.9 110.8 102.8 102.3 103.4 101.2 105.1 114.3 116.8

2017 112.7 112.1 111.4 111.4 110.7 112.4 110.4 110.1 112.6 113.6 112.3 112.7

2018 109.3 106.6 106.2 109.3 108.7 110.7 111.9 111.0 113.5 112.9 n/a n/a

Real effective exchange rate (2010=100; CPI-based)

2016 74.5 76.0 76.4 77.4 78.6 81.5 82.9 84.4 83.8 83.5 81.5 76.2

2017 76.6 77.1 76.9 78.7 76.6 76.9 75.3 76.1 74.8 73.8 73.8 73.5

2018 73.6 75.0 76.0 74.6 74.1 74.6 74.7 75.7 74.9 n/a n/a n/a

Budget revenue (¥ bn) 2016 4,786 3,569 4,582 5,788 4,790 7,753 4,331 4,859 4,260 3,243 4,181 7,645

2017 4,461 3,614 4,471 5,954 4,866 7,572 4,631 5,335 4,105 3,630 4,775 7,454

2018 5,302 3,827 4,442 5,982 5,452 7,909 5,274 5,220 4,116 3,989 n/a n/a

Budget expenditure (¥ bn) 2016 2,256 2,620 8,615 10,759 3,115 6,873 3,720 2,168 6,192 3,851 7,362 4,368

2017 2,635 2,298 8,949 10,446 3,076 6,703 3,819 2,592 6,120 3,748 7,050 3,937

2018 2,537 2,706 9,406 11,252 2,897 6,629 3,902 2,477 5,985 3,193 n/a n/a

Budget balance (¥ bn) 2016 2,530 950 -4,033 -4,971 1,676 880 611 2,690 -1,932 -609 -3,182 3,277

2017 1,825 1,316 -4,478 -4,492 1,791 869 812 2,743 -2,015 -118 -2,275 3,517

2018 2,765 1,121 -4,964 -5,270 2,555 1,280 1,372 2,743 -1,869 796 n/a n/a

Money supply, M1 (period average; % change, year on year)

2016 4.5 4.7 5.4 6.7 6.8 7.1 7.5 7.5 7.9 8.2 8.7 9.1

2017 9.5 9.5 8.8 7.8 7.6 7.7 7.5 7.4 7.6 7.5 7.3 6.8

2018 6.7 6.3 6.2 6.3 6.2 6.5 6.3 6.3 6.2 5.8 n/a n/a

Money supply, M2 (period average; % change, year on year)

2016 3.1 3.1 3.1 3.3 3.3 3.4 3.3 3.1 3.4 3.5 3.8 3.9

2017 4.0 4.1 4.2 4.0 3.8 3.9 4.0 4.0 4.0 4.0 4.0 3.6

2018 3.4 3.2 3.1 3.2 3.2 3.1 2.9 2.9 2.8 2.7 n/a n/a

Industrial production (seasonally adjusted; % change, year on year)

2016 -3.7 -1.0 0.4 -3.2 -0.6 -1.6 -4.2 4.5 1.5 -1.2 4.4 3.1

2017 2.8 4.3 3.3 5.7 6.2 5.2 4.5 5.0 2.5 5.7 3.6 4.5

2018 2.9 1.6 2.4 2.6 4.2 -0.9 2.2 0.2 -2.9 n/a n/a n/a

Retail sales (% change, year on year)

2016 -0.2 -1.4 -0.7 -0.7 -2.0 -1.1 -0.3 -2.2 -1.8 -0.3 1.6 0.9

2017 1.2 2.3 2.1 2.7 2.1 2.4 1.1 2.3 2.4 0.1 1.8 3.5

2018 1.5 1.7 1.0 1.4 0.6 1.7 1.5 2.9 2.4 n/a n/a n/a

Deposit rate (av; %)

2016 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.1 0.2 0.2

2017 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2

2018 0.2 0.2 0.1 0.1 0.2 0.1 0.1 0.2 0.1 n/a n/a n/a

Lending rate (av; %)

2016 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5

2017 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5

2018 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 n/a n/a

Nikkei 225 stock average (¥) 2016 17,518 16,027 16,759 16,666 17,235 15,576 16,569 16,887 16,450 17,425 18,308 19,114

2017 19,041 19,119 18,909 19,197 19,651 20,033 19,925 19,646 20,356 22,012 22,725 22,765

2018 23,098 22,068 21,454 22,468 22,202 22,305 22,554 22,865 24,120 21,920 21,846 n/a

Consumer prices (seasonally adjusted; % change, year on year)

2016 -0.1 0.2 0.0 -0.3 -0.4 -0.3 -0.5 -0.5 -0.5 0.2 0.5 0.3

2017 0.5 0.2 0.2 0.4 0.4 0.3 0.5 0.6 0.7 0.2 0.5 1.1

2018 1.3 1.5 1.1 0.6 0.6 0.7 0.9 1.3 1.2 n/a n/a n/a

Nominal monthly wages (% change, year on year)

2016 0.9 1.2 2.0 0.2 0.2 2.3 1.3 0.5 0.3 0.3 0.8 1.1

2017 0.5 0.4 0.0 0.7 0.5 0.3 -0.3 0.3 1.2 0.1 0.7 0.9

2018 0.3 0.4 2.2 0.3 2.2 3.1 1.4 1.2 1.2 n/a n/a n/a

Unemployment rate (% of workforce)

2016 3.2 3.3 3.2 3.2 3.1 3.1 3.0 3.1 3.0 3.0 3.1 3.1

2017 3.0 2.9 2.8 2.8 3.0 2.8 2.8 2.8 2.8 2.8 2.7 2.7

2018 2.4 2.5 2.5 2.5 2.2 2.4 2.5 2.4 2.3 n/a n/a n/a

Total exports fob (US$ bn)

2016 45.3 49.7 57.2 53.8 46.8 57.2 55.0 52.5 58.6 56.5 54.9 57.6

2017 47.2 56.2 64.0 57.5 52.1 59.6 57.8 57.2 61.5 59.3 61.3 64.7

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2018 54.9 59.9 69.6 63.4 57.6 64.1 60.5 n/a n/a n/a n/a n/a

Total imports cif (US$ bn)

2016 50.8 47.7 50.6 46.4 47.2 50.7 50.1 52.9 53.9 51.9 53.6 52.1

2017 56.8 49.1 58.7 53.2 54.0 55.7 54.2 56.3 55.6 56.8 60.4 61.5

2018 63.4 59.9 62.1 57.6 63.0 57.6 62.6 n/a n/a n/a n/a n/a

Trade balance fob-cif (US$ bn)

2016 -5.6 2.1 6.6 7.4 -0.4 6.5 4.8 -0.3 4.8 4.6 1.4 5.5

2017 -9.6 7.1 5.3 4.3 -1.8 3.9 3.6 0.9 5.9 2.5 0.9 3.2

2018 -8.6 0.0 7.5 5.8 -5.3 6.5 -2.1 n/a n/a n/a n/a n/a

Foreign-exchange reserves excl gold (end-period; US$ bn)

2016 1,220.7 1,223.7 1,231.6 1,230.8 1,224.1 1,232.8 1,231.7 1,223.8 1,227.5 1,211.4 1,190.2 1,188.3

2017 1,201.6 1,201.3 1,199.6 1,211.0 1,220.6 1,219.2 1,228.7 1,235.6 1,234.6 1,229.5 1,229.6 1,232.2

2018 1,235.3 1,229.2 1,235.6 1,223.6 1,222.2 1,227.8 1,226.0 1,229.5 1,230.2 n/a n/a n/a Sources: IMF, International Financial Statistics; Haver Analytics.

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Annual trends charts

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Quarterly trends charts

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Monthly trends charts

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Comparative economic indicators

Basic data

Land area

377,899 sq km

Population

127.8m (2017; UN)

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Main towns

Population in millions (2014):

Tokyo (capital; 23 central wards): 9.1

Yokohama: 3.7

Osaka: 2.7

Nagoya: 2.3

Sapporo: 1.9

Kobe: 1.5

Fukuoka: 1.5

Kyoto: 1.5

Climate

Temperate, with the monsoon season in June, seasonal winds and typhoons in August- September, and heavy snow in December-February on the Japan Sea side

Weather in Tokyo (altitude 5.3 metres)

Hottest month, August, 29°C; coldest month, January, 7.6°C; driest month, August, 9.5 mm rainfall; wettest month, September, 319.5 mm rainfall

Language

Japanese

Measures

Mainly metric system; local measures include: 1 tsubo = 3.3 sq metres; 1 sun = 3 cm; 1 ri = 4 km; 1 kairi = 1.8 km (used for sea distances)

Currency

Yen (¥); ¥1 = 100 sen. Average exchange rates in 2017: ¥112.1:US$1; ¥126.6:€1

Fiscal year

April 1st-March 31st

Time

9 hours ahead of GMT

Public holidays

January 1st (New Year); January 8th (Coming of Age Day); February 11th (National Foundation Day); March 21st (Vernal Equinox); April 30th and May 3rd-5th (Golden Week holidays); July 16th (Marine Day); August 11th (Mountain Day); September 17th (Respect for the Aged Day); September 24th (Autumnal Equinox); October 8th (Sports Day); November 3rd (Culture Day); November 23rd (Labour Thanksgiving); December 23rd (Emperor’s birthday)

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Political structure

Official name

Japan

Form of government

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Representative democracy

The executive

The prime minister is chosen by a ballot of the Diet (parliament) and appoints a cabinet, the majority of whom must also be members of parliament

Head of state

Emperor Akihito

National legislature

Bicameral Diet, comprising the 475-member House of Representatives (the lower house), which is elected every four years (the lower house now has a total of 465 seats), and the 242-member House of Councillors (the upper house), half of which is elected every three years for six-year terms. There are 295 seats representing geographical constituencies and 180 seats filled by proportional representation in the lower house

Legal system

A Supreme Court, appointed by the cabinet, presides over a legal system of lesser courts divided into four arms: the High Court, district courts, family courts and summary courts

National elections

The last election for the lower house was held in October 2017; the next poll is scheduled for 2021. A poll for half of the seats in the upper house was held in July 2016; the next election, also for half of the seats, is due in mid-2019

National government

The Liberal Democratic Party (LDP) was re-elected in the October 2017 lower-house election, winning 284 seats; its coalition partner, the Komeito party, won 29 seats. The coalition has a two- thirds majority in the lower house and a majority in the upper house

Main political organisations

Government: coalition of the LDP and Komeito

Opposition: Constitutional Democratic Party; Kibo no To (Party of Hope); Japan Communist Party; Initiatives from Osaka; Liberal Party; Social Democratic Party

Main members of the cabinet

Prime minister: Shinzo Abe

Deputy prime minister, minister of finance: Taro Aso

Chief cabinet secretary: Yoshihide Suga

Key ministers

Agriculture, forestry & fisheries: Takamori Yoshikawa

Defence: Takeshi Iwaya

Economy, trade & industry: Hiroshige Seko

Education, culture, sports, science & technology: Masahiko Shibayama

Environment: Yoshiaki Harada

Foreign affairs: Taro Kono

Health, labour & welfare: Takumi Nemoto

Internal affairs & communications: Masatoshi Ishida

Justice: Takashi Namashita

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Land, infrastructure, transport & tourism: Keiichi Ishii

Reconstruction: Hiromichi Watanabe

State ministers

Disaster management: Hachiro Okonogi

Economic & fiscal policy: Toshimitsu Motegi

Promoting dynamic engagement of all citizens “Cool Japan” strategy: Masaji Matsuyama

Regional revitalisation & regulatory reform: Satsuki Katayama

Tokyo Olympic & Paralympic Games: Yoshitaka Sakurada

Central bank governor

Haruhiko Kuroda

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