Japan's Economy is Staging a Big Comeback

For over three decades, the country was mired in what became known as the "Lost Decades," with slow growth and persistent deflation undermining confidence and spending. Various policies, including massive quantitative easing and even negative interest rates introduced in 2016, were unable to push inflation to the Bank of Japan’s (BOJ) 2% target.

However, recent trends suggest a shift. Inflation, which had been absent for years, has returned. In 2023, inflation reached 3.3%, its highest since 1991. By the end of 2024, monthly inflation hovered around 3%, and by January 2025, it spiked past 4%—more than double the BOJ's target. This resurgence in inflation could indicate renewed economic activity, a notable change from decades of price stagnation.

Wage growth has accompanied this rise in inflation. Average cash earnings have been increasing steadily since 2022, and as of the latest data, wages were up 4.8% year-over-year. This is significant for a country like Japan, where deflationary mindsets have historically limited consumer spending. Higher wages could boost domestic demand, a crucial element in sustaining economic momentum.

Another contributing factor to Japan’s turnaround is the weakened yen. While a weaker currency increases the cost of imports—especially concerning for resource-dependent Japan—it also stimulates exports by making Japanese goods cheaper abroad. This has led to a recovery in the trade balance and contributed to inflationary pressure, helping Japan escape its deflationary rut. Tourism has also surged as a result of the yen’s decline, with 2024 visitor numbers surpassing pre-pandemic levels, bringing increased activity to retail, hospitality, and transport sectors.

Japan’s export growth has outpaced its import growth in recent years, further strengthening the economy. The weak yen, despite its drawbacks, has been a net positive in stimulating demand, both domestically and internationally.

Corporate activity in Japan has also picked up, with a sharp increase in mergers and acquisitions. In 2024, the total value of M&A deals involving Japanese firms surged 44% to over $230 billion. Expectations for 2025 suggest continued strength in this area. These moves are allowing companies to consolidate, restructure, and remain competitive globally.

To bolster the economy, the Japanese government under Prime Minister Shigeru Ishiba introduced a massive stimulus package in November 2024, valued at over 39 trillion yen (about $250 billion). The measures include subsidies for electricity and fuel, direct cash handouts to low-income households, and tax relief. These policies aim to cushion the impact of rapid inflation, which—while helping combat deflation—has risen too quickly, creating concerns about eroding purchasing power.

Despite these positive developments, several challenges remain. Chief among them are Japan’s enormous public debt, demographic decline, and external risks such as trade tensions. Public debt is more than twice the size of Japan’s nominal GDP, but inflation could help ease this burden by reducing the debt’s real value over time. If nominal GDP increases due to inflation, the debt-to-GDP ratio could fall, making fiscal management more sustainable.

However, geopolitical risks loom. The return of Donald Trump to the U.S. presidency has brought a fresh wave of protectionist policies. Effective March 12, 2025, the U.S. imposed a 25% tariff on Japanese steel and aluminum, with plans to introduce a similar tariff on automobiles by April. Japan's attempts to secure exemptions have so far failed. These tariffs could pose a major threat to Japan’s automotive sector and overall export performance, given the importance of the U.S. market.

Source: Behind Asia