Japan's economy

Services account for about seven tenths of economic output, led by wholesale and retail trade, real estate, health care, finance and transport. Manufacturing contributes around a fifth, a higher share than in most advanced economies, and remains the backbone of exports and research spending. Agriculture, forestry and fishing contribute only about one per cent, although rice, fruit and fisheries are politically and culturally important.

Private consumption is the largest component of demand. Japan runs a large surplus on its current account, based less on goods trade than on income from its huge stock of foreign investments.

From the mid-1950s to the early 1970s Japan's economy grew at around ten per cent a year, driven by high investment, a skilled workforce, export-oriented industry and close cooperation between government and business. The oil shocks of the 1970s slowed growth, but Japanese cars and electronics conquered world markets in the 1980s.

After the Plaza Accord of 1985 sent the yen sharply higher, cheap credit fuelled an asset bubble in shares and land. When it burst in 1990–1991, banks were left with bad loans, and the following period of stagnation and falling prices became known as the Lost Decade, later the Lost Decades. Policy since then has combined bank restructuring, fiscal stimulus and increasingly unconventional monetary easing.

The automotive industry, with Toyota, Honda, Nissan, Suzuki, Mazda and Subaru and a deep supplier network, is the largest manufacturing sector. Japan is also strong in machine tools, industrial robots, precision instruments, electronic components, semiconductor manufacturing equipment and materials, chemicals and steel. Many of its firms are little known to consumers but hold dominant shares in niche components used worldwide.

In services, retailing, convenience stores, railways, logistics and a growing tourism industry stand out, while games, anime and other content industries have become significant exports.

Japan depends on imports for most of its energy and a large share of its food, and pays for them with exports of vehicles, machinery and high-tech components. China and the United States are its largest trading partners, followed by other Asian economies and the European Union. Over recent decades Japanese companies have moved much production abroad, so that output of their overseas subsidiaries far exceeds direct exports in some sectors.

Japan is a member of the World Trade Organization and has pursued a network of free-trade agreements, including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the Regional Comprehensive Economic Partnership (RCEP) and the Economic Partnership Agreement with the European Union.

Before 1945, family-controlled conglomerates, the zaibatsu – Mitsui, Mitsubishi, Sumitomo and Yasuda – dominated the economy. The occupation authorities broke them up, but their successor companies regrouped into keiretsu: networks of firms linked by cross-shareholdings around a main bank and a trading house. Vertical keiretsu, such as Toyota's supplier group, tie manufacturers to their suppliers.

Cross-shareholdings have been steadily unwound since the 1990s, and corporate governance reforms, pressure from the Tokyo Stock Exchange and active investors have pushed companies towards higher returns. More than 99 per cent of enterprises are small and medium-sized, and some family firms are among the oldest companies in the world.

The yen was introduced by the New Currency Act of 1871, replacing the complex coinage of the Edo period. The Bank of Japan, founded in 1882, issues the banknotes and conducts monetary policy with a price stability target of two per cent inflation, adopted in 2013. The Ministry of Finance mints the coins and decides on currency intervention.

From 1999 onwards the Bank of Japan pioneered zero interest rates, quantitative easing and, from 2016, negative rates and yield-curve control, becoming the largest holder of Japanese government bonds. It ended negative rates in March 2024 and began raising interest rates as inflation and wages picked up. The yen is one of the most traded currencies and is regarded as a safe haven in times of global stress.

A shrinking and ageing population weighs on growth, public finances and the labour market. Fewer workers must support more pensioners, and many sectors, from nursing care to construction, trucking and restaurants, report persistent labour shortages. Regional economies suffer as young people move to Tokyo.

Responses include raising the employment of women and older people, automation and robotics, digitalisation of public services and business, and wider admission of foreign workers through statuses such as Specified Skilled Worker. Tourism and investment in semiconductors and green technologies are also seen as sources of new growth.