(Last updated: 2 Dec 2011)

With a population of 127 million, Japan is the third largest global economy. The Japanese market is characterised by consumers with high levels of disposable income, and companies with a strong global orientation and willingness to invest in sustainable, long-term products and services. Japanese companies pride themselves at being at the forefront of innovation, spending 3.4 per cent of GDP in on R&D in 2007, compared with only 2.66 per cent in the US. (Source: OCED Factbook)

Japanese buyers are drawn to premium, higher end goods and services offering higher returns on trade investment. Japan has made a name for itself as a nation of quality and innovation, and has staked its future on this value proposition. Along with this comes a strong commitment and loyalty to business partners, once acquired.

The mainstream of the Japanese economy remains cashed up, both in terms of individual savings and liquidity, and in terms of corporate balance sheets. Japan is now faced with the dilemma of how best to utilise its significant assets in uncertain times.

As in hard times in the past, the Japanese are showing resilience and often demonstrate a stronger predilection for change under pressure. Understanding where and how the new changes will lead to new opportunities for Australia is both a challenge but also a unique window of opportunity in itself.

Country facts

(Source: Department of Foreign Affairs and Trade - Country economic fact sheet)

Economic climate

Japan is currently experiencing an unprecedented period of political and economic turmoil. The Global Economic Downturn has exposed Japan’s continuing heavy reliance on export led growth. Net exports and corporate capital expenditure are sharply down. Domestic consumption is less affected; however, buoyed also by government stimulus packages, as elsewhere.

The current upheaval, which has mostly been driven by external factors, is now starting to have far-reaching effects on certain sectors of the manufacturing economy and society in general. Most affected are the blue-collar and technical workers, as is common around the globe. This is likely to have a significant impact in terms of changes in social values, behaviour and consumption patterns.

The Japanese Government has spent several hundred trillion yen on economic stimulus packages in an effort to spur a recovery. However, the success of these packages is still in doubt as stagnation continues and Japan’s banks continue to hold large non-performing loans.

Changes that are evidence of the ‘new economy’ emerging in Japanese business practices include:

• High interest in IT-based solutions
• Demand for innovative cost effective business solutions which can include imported product and services
• Breakdown of traditional interlinked (keiretsu) business relationships
• Introduction of business-to-business (B2B) and business-to-consumer (B2C) e-commerce ventures
• Speeding up of the business decision making processes
• Introduction of Western management practices

Japan faces a number of challenges going forward, some economic and some structural. Many of these longer term drivers for change also favour Australia. Japan’s ongoing reliance on imported minerals and energy, and growing concerns over food safety and food security (with food self-sufficiency hovering at around 40 per cent) are priorities for them.

In addition, Japan’s silver generation faces challenges to preserve and grow their substantial wealth of US$14 trillion in household savings. As the population ages, Japan is tipped to be the world’s leading test bed for the silver market. Continuing emphasis on increasing productivity among the declining workforce, the need to more fully utilise women, increased reliance on technology for competitive edge and growth in outsourced services are key social and corporate themes.

Corporations are still relatively cashed up from rich profits in recent years, despite the alarming change in their current circumstances. The macroeconomic situation for Japan may certainly get worse before it gets better. At the heart of this, Japan’s large corporates are looking to invest their way out of the crisis. They continue to target M & A and greenfields investment opportunities worldwide, benefiting from low asset prices and a strong yen.

Japanese investors are there for the long-haul. They are looking for environmental technology, agribusiness, infrastructure and renewable energy opportunities in Australia alongside more traditional resource investments. Increasingly Japanese investments in Australia are targeted at the Australian domestic market itself, or aimed at using Australia as a springboard into Asia.

The prolonged economic slow-down is causing fundamental changes in Japanese business practice, which will ultimately have a positive impact on demand for Australian goods and services. These changes are evidence of a ‘new economy’ emerging in Japan where companies are being forced by market pressures, including government deregulation measures, to change traditional business practices. Despite economic growth stagnation, the sheer tremendous size of the Japan economy and its regional markets will always present opportunity for Australia.

Please also see DFAT's 'Great East Japan Earthquake: economic and trade impact' publication

For the latest key economic indicators and statistics, please see the Department of Foreign Affairs and Trade country economic fact sheet.

Political climate

Although the Japanese Government has little direct involvement in the operation of the private sector, through its ministerial bureaucracies it maintains tight supervision of firms via regulation and mandatory administrative guidance. It manages industrial policy by directing various sectors into suggested areas of enterprise and facilitating their entry by providing seed money and research, technical and regulatory support.

Under the revised post-war Constitution of 1947, Japan adopted a Westminster form of government. The Diet (Parliament) consists of a popularly elected House of Representatives (Lower House 500 seats) and a House of Councillors (Upper House 252 seats).

There are three tiers of government – National, Prefectural (State) and Local. The key political parties are the:

• Liberal Democratic Party
• New Komeito
• New Conservative Party
• Democratic Party of Japan
• Social Democratic Party of Japan
• Japanese Communist Party

Trade relations and statistics

As a world economic power, second only to the USA, Japan remains an important and influential player in global and regional affairs. Japan’s foreign policy is administered by the Ministry of Foreign Affairs.

Japan is an active member of the Asia Pacific Economic Cooperation (APEC) and the United Nations.

As the largest creditor nation in the world, Japan supplies Overseas Development Assistance (ODA) to many developing countries and actively participates in humanitarian programs worldwide.

The Japanese corporate trade network, particularly throughout Asia, is extensive and these connections potentially hold great opportunities for Australian exporters particularly linked to Japan’s ODA program.

Japan has traditionally been seen as a closed or difficult market to enter for foreign companies, and during the 1980s it was under considerable pressure (from the USA particularly), to open up its markets to foreign competition.

Acceptance of foreign imports is increasing as Japanese consumers demand greater variety and value for money.

At times, Japan’s bi-lateral relationships with several Asian nations have been strained for historical reasons. However, as the economies of many Asian countries are closely linked to their growing trade with Japan, concerted efforts by each government are assisting in building strong relationships for the new century in the Asian region.

Australia and Japan enjoy excellent relations built on more than 100 years of bi-lateral trade and exchange.

Japan signed a bilateral trade agreement - a Free Trade Agreement (FTA) with Singapore in October 2000.

Over the past decade, opportunities for Australian exports to Japan are heading increasingly through the massive regional markets of the Japanese economic - including the Kansai (Osaka area), as far north as Hokkaido, and the southern island of Kyushu.

Australia is one of only a handful of countries in the world that enjoys a trade surplus with Japan.

Commodities dominate Australia’s exports to Japan but the mix is becoming increasingly diversified with processed foods and beverages, ICT-related products and services and other manufactures increasing.

Austrade Japan has predicated its trade and investment strategy on four pillars underpinning the medium-term needs of the Japanese economy. These are food security and safety, energy security, the needs of an ageing society and a strong reliance on technology as a major driver of intellectual property and competitive edge.

Austrade in Japan pursues its business plan through the use of six industry teams with national coverage of priority sectors. These teams are Food and Beverage, Agribusiness and Clean Energy, Services, Consumer Products, Technology, and the Creative Arts.

Please see the Department of Foreign Affairs and Trade country economic fact sheet for key trade statistics.