Economic analysis
Japan

Japan

Population 125.8 million
GDP per capita 40,089 US$
A2
Country risk assessment
A1
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Synthesis

major macro economic indicators

  2019 2020 2021 (e) 2022 (f)
GDP growth (%) 0.0 -4.6 2.0 3.2
Inflation (yearly average, %) 0.5 0.0 -0.2 0.6
Budget balance (% GDP)* -3.7 -11.7 -8.1 -5.5
Current account balance (% GDP) 3.4 3.3 3.5 3.3
Public debt (% GDP) 235.4 254.1 256.9 252.3

(e): Estimate (f): Forecast *April 1 N-1 / March 31 N

STRENGTHS

  • Privileged location in a dynamic region
  • High level of national savings rate (around 25% of GDP)
  • Public debt is over 90% owned by local investors
  • Advanced technology products and diversified industrial sector
  • Trade agreement with the EU and Transpacific Partnership (December 2018)
  • Regional trade agreements (RCEP, CPTPP)
  • Excellent corporate payment behaviour

WEAKNESSES

  • Rapidly ageing population, risk of surging social security costs
  • Reduction of the workforce and low immigration contribution, increasing share of precarious workers
  • Difficulty in fiscal consolidation and reversing deflationary pressures
  • Low growth potential, low productivity of SMEs
  • Stagnant real wage growth

Risk assessment

Fragile recovery

Japan’s economic growth is expected to remain modest in 2022, but several downside risks could weigh on the outlook. After announcing a state of emergency thrice in 2021, with the third lasting nearly six months from April to September, the lifting of the emergency measures should provide a boost to domestic consumption (55% of 2019 GDP). Services business activity, which reflects domestic demand, showed an expansion in October 2021, the first growth recorded since the start of the pandemic in early 2020, according to PMI data. A high vaccination rate (80% of population in early January 2022) also adds resilience to economic reopening efforts. Nevertheless, the course of the pandemic in 2022 remains highly uncertain, and therefore acts as downward pressure on services consumption, and tourism (7% of 2019 GDP). Tight supply conditions would also likely constrain growth in exports and industrial production, particularly in the automotive industry (12% of GDP). Major Japanese automakers have announced output cuts throughout the latter half of 2021 due to shortages in auto components. Merchandise exports (14% of GDP) have been a key driver of Japan’s recovery from the pandemic, and could come under pressure in 2022 due to sustained supply disruptions and China’s economic slowdown. Business fixed investment will be closely linked to industrial and trade performance. In the longer term, Japan faces significant structural risks to its long-run growth potential, with the most critical being adverse demographic changes. Limited monetary policy space and fiscal consolidation needs are also major risks.

 

Slow fiscal consolidation

We expect the reduction in the general government fiscal deficit (as % of GDP) in the fiscal year 2022 (FY22, starting April 2022) to be gradual due to higher expenditure needs, particularly health and welfare-related expenses, even as tax collections improve amid continued GDP growth. Combined budget requests for FY22 were at JPY 111 trillion, up 4% from FY21’s JPY 106.6 trillion, with debt-servicing at over one-quarter of the total, and welfare spending at JPY 34 trillion (30% of total). The final spending is likely to be even higher since the government routinely forms extra budgets in each year since 2009, usually in the third or fourth quarter, which push back fiscal consolidation efforts. In November 2021, the government unveiled an extra budget for FY21 worth JPY 79 trillion, which is expected to raise new bond issuances to JPY 65.7 trillion, though still far lower than the JPY 112.6 trillion issued in FY20. Nevertheless, three rounds of heavy government stimulus since the onset of the pandemic are projected to push the level of outstanding long-term debt to JPY 1,212 trillion (USD 10 trillion) or about 217% of Japan’s GDP. However, over 90% of long-term public debt is owned domestically, with the Bank of Japan holding nearly half of outstanding debt after years of massive bond buying.

 
The current account surplus is expected remain in 2022, albeit slightly narrower, as a projected large positive income balance should offset a negative trade account. The upward trend in investment income since the mid-1990s, due to an increasingly positive net foreign asset (NFA) position linked to the rise in corporate saving, has helped offset a declining trend in the trade (goods and services) balance. A sustained global recovery in 2022 should underpin Japan’s investment income inflows. The trade balance is expected to remain in deficit as an estimated narrowing of services trade shortfall is likely to be offset by a smaller goods trade surplus. A gradual pick-up in travel-related services inflows on easing border restrictions and a modest rebound in international tourism should improve the services deficit. Meanwhile, a continued improvement in domestic demand would boost goods imports, thereby weighing on the merchandise trade balance, particularly when export growth (e.g. automobiles) is likely to slow amid prolonged supply chain disruptions and key material shortages.

 

Factional politics constrain policymaking

New prime minister Fumio Kishida led the ruling Liberal Democratic Party (LDP) to victory in the 2021 general election, retaining a sole but smaller majority (56%) in the more powerful lower house. The ruling coalition controls 63% of the House of Representative. However, the loss of LDP seats could mean that LDP may need to show more consideration to Komeito when making policies, especially in expenditure items. This is important ahead of the upper house election in summer 2022, where the LDP only held 45% of seats, and had to rely on Komeito for a majority. Factional politics within the LDP could constrain the ability of Kishida’s administration for bold reforms, including generational renewal in the party. In the short-term, Kishida will focus on domestic issues, particularly anti-pandemic measures and economic recovery. An adroit ability to balance Japan’s relations with China and the United States will be a key foreign policy challenge for Kishida. Meanwhile, relations between Japan and South Korea will likely remain tense.

 

Last updated: February 2022

Payment

Japan has ratified the International Conventions of June 1930 on Bills of Exchange and Promissory Notes, and of March 1931 on Cheques. As a result, the validity of these instruments in Japan is subject to the same rules as in Europe.

The bill of exchange (kawase tegata) and the much more widely used promissory note (yakusoku tegata), when unpaid, allow creditors to initiate debt recovery proceedings via a fast-track procedure, subject to certain conditions. Although the fast-track procedure also applies to cheques (kogitte), their use is far less common for everyday transactions.

Clearing houses (tegata kokanjo) play an important role in the collective processing of the money supply arising from these instruments. The penalties for payment default act as a powerful deterrent: a debtor who fails twice in a period of six months to honour a bill of exchange, promissory note, or cheque collectable in Japan is subsequently barred for a period of two years from undertaking business-related banking transactions (current account, loans) with financial establishments attached to the clearing house. In other words, the debtor is reduced to a de facto state of insolvency.

These two measures normally result in the calling in of any bank loans granted to the debtor.

Bank transfers (furikomi), sometimes guaranteed by a standby letter of credit, have become significantly more common throughout the economy over recent decades thanks to widespread use of electronic systems in Japanese banking circles. Various highly automated interbank transfer systems are also available for local or international payments, like the Foreign Exchange Yen Clearing System (FXYCS, operated by the Tokyo Bankers Association) and the BOJ-NET Funds Transfer System (operated by the Bank of Japan). Payment made via the Internet site of the client’s bank is also increasingly common.

Debt collection

In principle, to avoid certain disreputable practices employed in the past by specialised companies, only lawyers (bengoshi) may undertake debt collection. However, a 1998 law established the profession of “servicer” to foster debt securitisation and facilitate collection of non-performing loans (NPL debts) held by financial institutions. Servicers are debt collection companies licensed by the Ministry of Justice to provide collections services, but only for certain types of debt: bank loans, loans by designated institutions, loans contracted under leasing arrangements, credit card repayments, and so on.

 

Amicable phase

A settlement is always preferable, so as to avoid a lengthy and costly legal procedure. This involves obtaining, where possible, a signature from the debtor on a notarised deed that includes a forced-execution clause, which, in the event of continued default, is directly enforceable without requiring a prior court judgement.

The standard practice is for the creditor to send the debtor a recorded delivery letter with acknowledgement of receipt (naïyo shomeï), the content of which must be written in Japanese characters and certified by the post office.

As of 1 April 2020, statute of limitation period has changed.
For the debts accrued after 1 April , the statute of limitation period of the debts is 5 years from the date of the knowledge of the creditor of the collectability of the debts and 10 years from the date of the accrual of the debts in accordance with Article 166(1) of the Civil Code revised and informed as of 1 April 2020.

 

Legal proceedings
Fast-track proceedings

Summary proceedings, intended to allow creditors to obtain a ruling on payment (tokusoku tetsuzuki), apply to uncontested monetary claims and effectively facilitate obtaining a court order to pay (shiharaï meireï) from the judge within approximately six months.

If the debtor contests the order within two weeks of service of notice, the case is transferred to ordinary proceedings.

 

Ordinary proceedings

Ordinary proceedings are brought before the Summary Court (kan-i saibansho) for claims under JPY 1,400, and before the District Court (chiho saibansho) for claims above this amount. Those proceedings, partly written (with submission of arguments and exchanges of type of evidence) and partly oral (with respective hearings of the parties and their witnesses) can take from one to three years as a result of the succession of hearings. These proceedings generate significant legal costs.

The distinctive feature of the Japanese legal system is the emphasis given to civil mediation (minji chôtei). Under court supervision, a panel of mediators – usually comprised of a judge and two neutral assessors – attempts to reach, by mutual concessions of the parties, an agreement on civil and commercial disputes.

In practice, litigants often settle the case at this stage of the procedure, before a judgment is delivered. While avoiding lengthy and costly legal proceedings, any transaction obtained through such mediation becomes enforceable once approved by the court.

 

Enforcement of a legal decision

A court judgment is enforceable if no appeal is lodged within two weeks. If the debtor does not comply with the decision, compulsory measures can be ordered through an execution against Real Property (an Examination Court issues a commencement order for a compulsory auction) or an execution against a claim (a compulsory execution is commenced through an order of seizure).

Japanese law provides for an exequatur procedure in order for foreign awards to be recognised and enforced. The court will verify several elements, such as whether the parties benefited from a due process of law, or if enforcement will be incompatible with Japanese public policy. Furthermore, if the issuing country does not have a reciprocal recognition and enforcement treaty with Japan, the decision will not be enforced by domestic courts.

 

Insolvency proceedings

Restructuring

There are two types of restructuring proceedings. The first of these is corporate reorganisation proceedings (kaisha kosei), which are typically used in complex insolvency cases involving stock companies. They come with the mandatory appointment of a reorganisation trustee by the court and with a stay against enforcement by both secured and unsecured creditors. The court typically appoints a third-party bengoshi with substantial experience in restructuring cases.

The second of these is civil rehabilitation proceedings (minji saisei), which are used to rehabilitate companies of almost any size and type. The debtor-in-possession (DIP) administers the rehabilitation under supervision of a court-appointed supervisor. Enforcement by secured creditors is not stayed in principle. The debtor must enter into settlement agreements with secured creditors in order to continue using the relevant collateral to conduct their business.

 

Winding up proceedings

There are two winding up proceedings. In bankruptcy proceedings (hasan), the court appoints a lawyer as trustee to administer the proceedings. Enforcement by secured creditors is not stayed; rather, they can freely exercise their claims outside of the bankruptcy proceedings. The trustee will usually attempt to sell secured collateral with the agreement of the secured creditors and contribute a percentage of the sales proceeds to the estate. The debtor’s estate is distributed to creditors in accordance with prescribed statutory priorities without any need for voting by the creditors.

The second, special liquidation (tokubetsu seisan), is used for stock companies. A liquidator is appointed by either a debtor’s shareholders or the court. Distributor of the debtor’s estate to creditors has to be approved by creditors with claims to two-thirds or more of the total debt or by way of settlement. This procedure is used when the debtor’s shareholders are confident that they will obtain creditors’ cooperation for the liquidation process, and wish to control the liquidation process without involvement of a trustee.

Insolvency trend Japan
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