Japan: Risk Assessment
Country Risk Rating
Business Climate Rating
- Privileged location in a dynamic region
- Very high level of national savings rate (around 23% of GDP)
- Public debt is 90% owned by local investors
- Advanced technology products and diversified industrial sector
- Trade agreement with the EU and Transpacific Partnership (December 2018)
- Excellent corporate payment behavior
- Difficulty of consolidating public finances and bringing an end to deflationary pressures
- Reduction of the workforce and low emigration contribution; increasing share of precarious workers
- Low growth potential, low productivity of SMEs
- Still insufficient female labor participation, lack of child care
- Aging population at risk of jeopardizing the social security system
Growth to slow down in 2020
In 2020, the economy is likely to slow, largely due to the shackling effect of the sales tax hike (to 10% from 8% in October 2019) on private consumption (56% of GDP). In this context, consumer confidence should remain depressed despite ticking up in October and a low unemployment rate (2.4% in 2020), while the PMI fell into contractionary territory in October for the first time since mid-2016; both the sales tax hike and Typhoon Hagibis hit the reading. Nevertheless, the consumption tax rate was accompanied by measures to smooth demand volatility and mitigate the impact on the economy, including: a point-reward program for cashless payments in SME; a tax allowance for automobile and house purchases; infrastructure investment; and additional spending for childcare and tertiary education. On the other hand, clashes with South Korea and the US – China trade war will continue to constrain the external sector. Adverse external conditions will dampen export-driven private investment and manufacturing. However, non-manufacturing investment is expected to stay firm due to investment in labor-saving technologies. Furthermore, the government will apply new tax incentives in April 2020 for businesses to utilize their corporate cash stockpiles (84.3% of GDP) for productive use, and align the corporate tax code more closely with the digital economy for driving private investment and growth. Domestic demand is then likely to be a drag in 2020, which will in turn exacerbate deflationary pressures. Inflation should remain well below the Bank of Japan’s (BoJ) 2.0% target due to Japan’s deep-seated “deflationary mindset”. BoJ will likely keep its ultra-accommodative monetary policies in place throughout 2020, which will continue to sustain growth.
A heavy debt load
The current account is expected to remain in surplus, but this could again slightly narrow in 2020. The Yen is expected to weaken in 2020, worsening the terms of trade. Export (transport equipment, construction and manufacturing equipment, electronics, specialty chemicals, optics…) growth is set to decline due to slower global demand. Moreover, exports (14% of GDP) may be impacted by the US-China trade war, as Japan is exposed via supply-chain links. The consumer boycott of Japanese products by South Korea (clothes, cars) may also weigh on the current account as exports to South Korea make up about 7% of total Japanese exports. While the large yields on overseas investments will remain the mainstay of the income account surplus (3.6% of GDP), the current account will also benefit from inflows on the services front (3.5% of GDP), because of the rise of tourism notably, the Chinese one. The Tokyo 2020 Olympics should also increase the number of tourists this year.
The fiscal deficit is expected to narrow slightly in 2020, with the main factor driving this enhancement being the decline of infrastructure investments ahead of the Tokyo 2020 Olympic Games. Nevertheless, reconstruction works following the 2018’s disasters and typhoon Hagibis in October 2019 will still add to budgetary expenses. The social spending will continue to weigh significantly (33,7% of expenditures) on the state budget. In terms of revenues, increase in the sales tax will be insufficient to narrow the deficit substantially. Despite debt representing 236% of GDP, its service burden represents only 25% due to low interest rates at 0% on the 10-year government bond, as residents own 90% of it. Ttherefore, there is little space to implement further fiscal stimulus going forwards.
Difficult international context
Prince Naruhito became the 126th emperor of Japan in May 2019. Shinzo Abe, Prime minister and President of the ruling Liberal Democratic Party, reshuffled his Cabinet on September 2019, which has the priority to boost efforts to reform the nation’s social security systems. He enters the last two years of his final three-year term.
Internationally, the Abe government on October 2019 signed off on a bill that would ratify the new trade deal with the United States, enabling to protect Japanese manufacturers from the US’s customs reprisals. On the other hand, its relationship remains delicate with China and icy with North Korea and South Korea. With the latter, the dispute over compensation for forced Korean labor during Japan’s colonial rule is the issue at the heart of the diplomatic and economic disputes between the two countries. Nevertheless, South Korea announced that it will not leave the General Security of Military Information Agreement (GSOMIA), the strategic military information exchange agreement it shares with Japan. Sides have agreed to hold talks over Japan’s export dominance on three chemicals critical to the manufacture of semiconductors and displays by South Korea.