Japan's Economic Outlook in Five Charts
An older and a younger man sitting in front of Tokyo’s Ginza district. By 2050 the number of aged dependents per worker will rise to about 75 percent, the highest of any country (photo: Friso Genrsch/picture alliance/Newscom)
November 28, 2018
Japan has had an extended period of strong economic growth. On the policy front, six years of “Abenomics” saw lower fiscal deficits, near-record unemployment, and higher female labor force participation. But inflation remains stubbornly low, and macroeconomic and financial sector challenges are set to grow as demographic headwinds—the aging and shrinking of Japan’s population—intensify.
After a temporary soft patch earlier in the year, GDP growth is expected to remain above its estimated potential in 2018 at 1.1 percent. Inflation has gained momentum on the back of higher energy prices but—despite a very tight labor market—remains below the Bank of Japan’s (BoJ’s) 2 percent target. Financial conditions overall remain generally favorable.
Japan's parliament passed labor market legislation designed to set a legal cap on overtime work, ensure equal treatment for regular and nonregular workers, and exempt skilled professional workers from working-hour regulations, but the effectiveness of the new laws will hinge on implementation. Efforts to bring more workers into the labor force are meeting with success, with women, older workers, and inflows of foreign labor contributing to the gains. Corporate governance reforms have advanced, and the trade agenda has accelerated with two new trade agreements.
While economic growth is expected to remain solid, some downside risks exist. The planned consumption tax increase in 2019 could hinder near-term growth momentum. Weaker global growth and heightened uncertainty—from trade or geopolitical tensions—could also undermine growth, trigger yen appreciation and equity market shocks, and renew deflationary risks. The target date for a return to fiscal surplus was also reset from FY2020 to FY2025.
Below are five charts that shed light on Japan’s economic profile and policy priorities:
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