Tuesday 27 Jun 2017 | 08:45 | SYDNEY
What's happening on

Japanese Economy


Japanese economic reform has been a focus of the Shinzo Abe government since it came to power in late 2012. The reforms are seen as necessary by Abe to revive Japan’s stagnant economy that has experienced low levels of economic growth over the last two decades. Abe is seeking to restructure the economy, to further the role of women in the economy and also tackle some of the powerful vested interests.

Despite the recent stagnant state of the Japanese economy, the size of Japan’s economy – the world’s third largest measured by nominal GDP – still makes it globally significant. China and the United States are Japan’s major trading partners and Japan’s exports are primarily in goods that have high levels of research and development, such as motor vehicles and electronics. In the Australian context, it is Australia’s second largest trading partner and also a very important investor in the country.


Shinzo Abe's plan for economic reform and stimulus, dubbed "Abenomics", takes a three-arrowed approach to boost the economy through monetary, fiscal, and structural policies.

The fiscal arrow is intended to provide strong stimulus, followed by tax increases to decrease the budget deficit, which is currently running at 8% of GDP. The initial stimulus was designed to provide enough economic momentum so that even with the subsequent tax increases, the economy would be healthy enough to absorb the contraction.

The monetary arrow aims to increase inflation and reduce real interest rates through monetary policy easing. The fiscal and monetary arrows were released within the first months of Abe’s government

The Structural Arrow targets Japan's long-standing economic deadlock. How this will work in practice is still being decided. But there are manifold structural challenges: agriculture is small-scale and inefficient; the construction sector relies on easy profits from government contracts; the service sector is weighed down by labour-intensive methods and uncompetitive practices; and female workforce participation is 10% lower than the OECD average.

There have been early signs of success for the first two arrows of Abenomics but it is still too early to tell of long-term success.

Trans-Pacific Partnership (TPP)

The TPP is an ambitious plan for a free trade agreement being negotiated among a dozen countries which, if successful, will account for two-fifths of world trade. The twelve countries are the United States, Japan, Brunei, Malaysia, Vietnam, Singapore, Australia, New Zealand, Canada, Mexico, Chile and Peru.

The TPP has been viewed as a key part of the US rebalance to Asia. Japan, as the second largest economy among TPP countries, is key to negotiations. Japanese resistance has been strong in the agricultural sector, particularly on the five so-called "sacred" agricultural products. However the United States has already agreed to let Japan keep its tariff on rice, wheat and sugar in exchange for Japan taking non-tariff measures to increase the imported quantities. Japan and the United States are involved in ongoing negotiations on beef and pork tariffs.

The hurdles to implementing the TPP are high just because the project itself is so ambitious. In Japan the domestic political climate favours Mr Abe somewhat. Mr Abe is still relatively popular and the rival opposition party, the Democratic Party of Japan, promoted the TPP while it was in power.

Australia-Japan free trade agreement (FTA)

Australia and Japan signed an FTA during Australian Prime Minister Tony Abbott’s visit to Japan in April 2014. It included provisions to reduce tax on some agricultural industries for Australian exporters to Japan. This led to complaints from several agricultural industries that only some Australian farmers stood to gain from the FTA. The rules for Japanese investors in Australia were also relaxed under the FTA. Private investors investing in a project valued at less than AUD 1 billion will be able to invest directly without application to the Foreign Investment Review Board (FIRB).

What the Lowy Institute does

The Lowy Institute publishes commentary on the strategic and economic considerations of Japan and its major economic partners. Nonresident Fellow Mr Murry Mclean AO is a former Ambassador to Japan. Lowy Institute economic analysts such as Stephen Grenville and Mike Callaghan also regularly contribute to a rich discussion on economics in Asia, including Japan, on the Lowy Interpreter blog.



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