Japan’s Economy: From Lost Decades to Promising Revival!


Key Points

Japan’s financial market is looking mighty tempting, especially with the looming economic downturn in the US and China’s lackluster post-pandemic recovery. As the world’s third-largest economy, Japan is showing signs of breaking free from its deflationary slump and enjoying relative stability.

Shaking Off the “Lost Three Decades” Narrative

When examining macroeconomic indicators, it is evident that Japan is on track to recover from the pandemic-induced downturn and restore its pre-pandemic levels. Leading economic indicators, which have a strong correlation with GDP performance, have shown a slight increase (97.6 in April 2023).Although they have yet to surpass the baseline of 100, indicative of robust fundamentals, they have significantly improved compared to the pre-pandemic level of 90.7.


In May, Japan’s Manufacturing Purchasing Managers’ Index (PMI) rose to 50.6, crossing the threshold into expansion territory, while the Services PMI continued to climb to 56.3. These figures align with the resilient growth momentum in the post-pandemic service sector and the revitalization of manufacturing, leading to positive outlooks for Japan’s economy in various sectors such as retail, dining, manufacturing, agriculture, forestry, and fisheries.


The respondents surveyed by the Japanese Cabinet Office also expressed considerable optimism, with their expectations surpassing the neutral 50-point threshold, reflecting a continuous upward trend.

Promising Signs

Japan’s housing price index has surged from 92 pre-pandemic to 115.9 in March this year, signaling a favorable trend. Moreover, business investments have been on the rise, and the official GDP growth for Q1 was revised upward to 2.7%, surpassing the initial estimate of 1.6%. While Taiwan’s exports have taken a hit this year, exports to Japan have seen continuous monthly growth over the past two months.

Industries in Transition

Japan’s consumer price index (CPI) has surpassed the Bank of Japan’s 2% target, reaching 3.5% in April, with the core CPI rising to 4.1%. This indicates a positive trend in inflation. However, some argue that part of Japan’s inflationary pressure comes from imported inflation rather than purely demand-driven factors. Nevertheless, we believe that the key to overcoming deflation lies in transforming industries.

Yen Depreciation’s Impact on Exports and Manufacturing

As for the impact of yen depreciation on exports and reshoring of manufacturing, some argue that major export sectors like electrical equipment, machinery, and transportation have maintained their international competitiveness, rendering the impact of yen depreciation relatively insignificant.


Furthermore, Japan’s exports only contribute 18.4% to its GDP, significantly lower than the consumption-driven components, which account for over 60%. So, while yen depreciation may boost the profitability of some export-oriented companies, it won’t contribute substantially to GDP growth.


Looking back, Japan’s efforts to depreciate the yen in 2004 resulted in a short-lived manufacturing resurgence, but subsequent industry changes and shifts in global competitiveness caused companies like Sharp and Panasonic to face substantial losses.


However, this current wave of reshoring in Japanese manufacturing differs from previous instances. While yen depreciation plays a role, the main driving force behind the revival lies in the evolution of the global supply chain, triggered by the strategic tussle between the US and China, the focus on production resilience post-pandemic, and subsequent supply chain restructuring.


Our observations indicate that companies returning to Japan will focus on highly efficient industries that align with Japan’s economic strategy and participate in the semiconductor supply chains, alongside the US, Taiwan, and South Korea. Considering these factors, as well as the influence of global monetary policies, geopolitics, the ongoing pandemic, and relevant domestic policies, Japan has reached a turning point, gradually emerging from the “Lost Three Decades” abyss.


The financial market has already caught onto this shift and is leading the way. Japan is expected to successfully undergo industrial transformation and set a new growth paradigm for a matured economy. With its strategic focus on efficient industries and collaboration in the semiconductor supply chain, alongside the US, Taiwan, and South Korea, Japan’s economic revival is on the horizon.