• Key policy rate: 0.25% (October 2024) 
• GDP growth rate: 0.9% (Q3 2024) 
• Full-year GDP growth target: 1.3% (April 2024-March 2025) 
• Manufacturing Purchasing Managers’ Index reading: 49.5 (October 2024)
• Inflation rate: 2.5% (September 2024) 

Japan slid to being the world’s fourth-largest economy in 2023 as weak consumer spending persisted despite negative interest rates. Its rapidly aging population prefers saving over spending, and this has kept economic growth stagnant over the past decade. 

Since 2016, banks and individual depositors were essentially penalized for keeping their cash in the bank, but this did little in terms of incentivizing consumption and investments. The Bank of Japan (BOJ) maneuvered the economy’s exit from negative interest rates after eight years – the longest maintained by any country – with a rate hike in March 2024, and again in July amid rising inflation. 

The BOJ’s rate hike briefly provided a boost to the local currency after weakening to the 160 level against the US dollar that provide some lift to exports. International trade accounts for a third of economic activity, although Japan has seen three straight years of a trade deficit, largely due to a weak yen that raised import costs. As of 2023, Japan’s top exports are motor vehicles, semiconductors, and integrated circuits, while major import items are fuels, natural gas, and chemical products. 

Meanwhile, manufacturing accounts for nearly a fifth of Japan’s GDP, a share that has been gradually declining. Japan also leads the production of high-technology exports globally. However, data from the Purchasing Managers’ Index over the past year suggest a continued contraction in factory output in Japan. 

The International Monetary Fund has flagged that private spending and investments remain below pre-pandemic levels and thus stand in the way of unlocking faster growth for Japan’s economy. 

House view: Japan is a mature economy that is grappling with an aging population and weak onshore demand. However, it remains to be an important player in global manufacturing largely because of its contributions to technological advancements and innovation.

Higher interest rates set by the BOJ, coupled with its decision to gradually let go of yield curve control to allow market rates to ascend, will lend some support towards positive investor sentiment. However, domestic concerns regarding its aging economy and rising inflation could dampen market appetite towards Japanese assets.

Updated as of 20 November 2024