Japan: Political and Economic Environment

Executive summary

When looking for a potential market for an investor, there are various considerations that one ought to make to be certain that his or her products or services will get a ready market in the target country. Some of these factors include the demographic structure of the country, number of employed people and the average income earned in the country. It is imperative to consider the economic system of the country, political stability of the country as well as the availability of a ready market in the country for the intended product or service. Based on these factors, Japan is one of the countries with high potential for investors. It is one of the most populous countries in the world with most of its population consisting of the old. Japan has maintained a good relationship with its neighbors. Even though it has been found to differ with countries such as North Korea, its political stability has not been found to threaten investors. It is a member of APEC thus having a good relationship with the member countries of this group.

Japan’s economic system has been found to be inclined towards capitalism. There is limited influence by the government on how investors operate their businesses. This gives them an opportunity to diversify their operations as they wish. Despite the recent economic recession, the country’s gross domestic production has been found to regain its status at a high pace. This is an impression that the country’s economy was not strongly affected by the economic crisis. The country’s Yen has also been found to be stable against other currencies. As a way of encouraging FDI, the Japanese government has tried to do away with most of the economic policies that were found to scare away potential investors from investing in the country.

All the highlighted features of Japan implies that it is one of the countries that potential investors are supposed to focus on. The fact that most of its population live in towns and complies with the old generation implies that the country can not be able to provide itself with most products such as food. This gives an opportunity investors dealing in food products to export to this country. With most of the FDI focusing on services industry, there is a chance for investors dealing in other industries to invest in the country.

Japanese demographic structure

Japan is regarded as the tenth most populous nation with approximately 127, 076, 183 people as per the records established in 2009. Most of the Japanese population lives in urban areas with limited number of the people working as laborers in agricultural sector. For those who work as farmers, they also engage in other part-time jobs to increase their earnings. As a result, almost all Japanese have substantial earnings regardless of where they live making it a potential market for investors. People are guaranteed of potential market in 5the country as its population has access to finance. The country’s population is monolingual with most of the population speaking Japanese. However, there are some minorities groups from Brazil, Korea, and China as well as some Ainu and burakumin communities (Thomas White, 2008, para. 2-4). The fact that most of the population speaks one language makes it possible for investors to effectively understand the cultural practices and preferences of the population. Unlike in many countries where investors are faced with the challenges of having to understand cultural preference of different language groups in the country, most of the Japanese market has similar preference and buying trend making it possible for investors to effectively understand the market.

According to reports issued by United Nations World population, the population density in Japanese urban areas was found to be 336 persons per square kilometer. This increase in population in the country is credited to high life expectancy level in the country. As per reports published in 2007, it was found that 21.2% of the total population in the country aged 65 years and above (Thomas White, 2008, para. 6). The current average age of the population is forty one years. Improvement in health facilities in the country as well as literacy level in the country has helped the country reduce on mortality level in the country. The rate of aging population is very high implying that if no action is taken, the country will soon lack labor force. This will lead to it depending on labor force as well as products from other countries. It is with this respect that Japan acts as a potential market place for investors. With the aging population requiring living a healthy life, there is high need for different products such as agricultural and medical facilities. This means that investors will benefit by investing in the country. The level of literacy in Japan has been found to be 99% with most of the people being able to read and write. This is advantageous to investors as they can be able to freely interact and relate with the target market (United States Library of Congress, 2007, para. 4). Communication barrier is one of the problems that scare away investors. This is because it becomes difficult to explain to customers on how to use different products or services. However, with the Japanese population comprising of literate people, it becomes possible for any investor to venture into the market.

Japanese political environment

Political status of any country determines whether investors will be able to reap by investing in the country or not. One of the factors that have made Japan develop is its good relationship with its neighboring countries. The country has been able to concentrate on development without thinking of external threats as it has been in a good relationship with its neighbors (Kapila, 2010, para. 1-4). However, currently, the country has been engaged in international securities such as Japan-US security Relationship. This has adversely affected the country. This political engagement has encroached into the domestic politics leading to changes in governing system. Japan has recently been found not to be in good relationship with most of its neighboring countries such as Korea and China. This poor relationship with neighboring states further affects the political stability of the country. It is this factor that may scare away investors from venturing into the market despite its potential. For many years, Japan has been considered as one of the most politically stable nation in East Asia being able to balance its relationship with other countries in the region. However, its political instability is making most of the global investors shy away from investing in the country. It calls for the country to restructure its political system to win the trust of investors.

In 2008, World Bank ranked Japan at +1.02 with respect to political stability implying that the country was politically stable. This is a good confirmation to investors on the potential of the Japanese market. Fort many years, the country has struggled to be fully integrated in the Security Council of the United Nations (Kapila, 2010, para. 5). It has already won the fight and is currently recognized as a member of the Security Council. This move will help the country focus on enhancing its economic power. This is an issue that has been neglected for many years.

Being one of the economic powers, Japan is a member of Asian-Pacific Economic Cooperation (APEC) as well as G8. It has also established good relationship with other market blocks such as East Asia Summit. Its good relationship with these blocks makes it possible for investors who are members of the blocks to invest in Japan.

Japanese economic environment

Japanese economic system can be seen as one that has gone through numerous revolutions. Initially, the country began with an economic system that was dominated by agriculture. During this period, Japan traded with only those trade partners that they trusted. They did not allow open trade with other countries. This made it difficult for foreigners to invest in the country. The country had no knowledge on the benefits gained by trading its goods with other countries or allowing foreigners to directly or indirectly invest in the country. After this era, the economic system then went to the stage where it was dominated by industrial growth. It is during this period that Japan started focusing on trade system (Liping, 2007, para. 2-4). They started coming up with domestic industries such as those that dealt with textile, ships and steel. On realizing the benefits accrued from trading with other nations, the country vigorously started developing huge industries.

The current economic system of Japan can be referred to as the Information Age Economic system. In this system, Japan is striving to increase the number of its industries to help it improve its revenue. The country has concentrated on coming up with new innovations as well as perfecting those that have already been established. The fact that Japan has embarked on supporting capitalism system of economy has led to most of the investors work hard. There is limited influence by the government on the investors operations (Tatum, 1997, para. 1-5). This has made it possible for people to invest in the country with limited interference. The current system of economy in Japan encourages investors as they are guaranteed that their returns will be based on their effort. Unlike in communism system of economy where the government dictates on manner in which investors are to operate, the Japanese system of economy gives investors an opportunity to expand and diversify their operations as they wish. This is a great opportunity for potential investors bearing in mind that the country has ready market due to its huge population.

Just like other countries of the world, Japanese economy was affected by economic crisis that rocked the world. However, its Gross Domestic Production (GDP) was found to rise by 4.8& annual increase. This was against many people’s speculation. This triggered the desire by Japanese policy makers to come up with measures to stimulate economic growth of the country. One of the factors that have led to this growth is increase in public investment. More than a third of the countries industries are still not working. This has resulted to most business organizations not hiring new staffs and investing on areas that would help the country revive its economy (Clenfield, & Ito, 2009, para. 1-4). This acts as a potential opportunity for investors who wish to venture into the Japanese market. The desire by the country to revive its economy calls for more investors. Introduction of government incentives in the country has led to increase in consumer spending. People have been found to spend more on motor vehicles as well as other home appliances. With consumer spending going high by 0.7 percent, investors are assured of making sales on venturing into this market.

Currently, Japanese agriculture employs approximately 3.12 million people which is about 5.2% of the entire population. Most of those working in the agricultural sector are the elderly. Most of the people practice part-time farming where they work in industries and return to farm during winter and summers. For those who have maintained farming, it is due to government incentives. Initially, returns from agriculture were found to be high. However, the move by most of the able farmers to work in other industries has led to reruns going down to as little as ¥4.81 billion in 2005. This has led to the country not being able to fully support itself with food. The rate of rice production in the country has gone down by twenty percent in the last ten years (Clenfield & Ito, 2009, para. 5-7). This implies that the country has to depend on food import. Investors in industries that deal with food products have a potential market in Japan as the country struggle to ensure that it has fully supplied its citizens with food.

Of the workforce in the country, about 27.7% work in heavy industries while light industries employ more than 62% of the total labor force. The amount of wages earned by these people varies according to the nature of employment and type of industry one is working in. There has been an increase in the number of women participating in the country’s labor force. This implies that income in the nations has been well distributed with respect to gender. As everybody has access to income, it means that everyone is capable of purchasing products thus making Japan a good place to invest.

Government disbursements as a percentage of the Gross National Production range from 30.9% while its revenue as a percentage of GNP is approximately 27.9%. This implies that there is high government disbursement with respect to its revenues with an aim of improving the well being and economic status of the country. With mot of the country’s GND being ploughed back to develop the nation, it means that the country has good infrastructure and other facilities to help in trade. It is therefore a nice place for investors as they are not likely to face infrastructural problems when trading. Low amount of government revenue in form of tax implies that investors are not heavily taxed in the country making Japan a good place to invest in.

High economic growth in Japan has led to it being one of the European Union (EU) major trade partners. The country is known to have the biggest foreign currency reserves as well as the best savings mechanisms. There is great potential for European trading partners to invest in Japan. The favorable exchange rate in Japan makes it more attractive to investors. Over the past decade, EU has heavily invested in Japan with 2.36% of its outward foreign direct investment coming from Japan. Changes have been made in various business sectors in Japan such as communication, financial and distribution sectors attracting more investors. However, foreign investment in the country is still low covering only 4.1% of the country’s GDP. This is a clear indication of the availability of potential sectors for investors to venture in.

Japanese economy has been found to be strong against other economies. One of the factors is its positive balance of trade with other countries (European Commission. 2010, para. 1-3). The country has huge reserve of foreign exchange making it withstand competition from other nations. This has resulted to the countries Yen marinating value with respect to United States dollar. In April 2010, the country’s inflation rate was found to be at 1.20%. The table below shows the trend in country’s inflation rate for the last financial year.

The trend in country’s inflation rate
Figure 1. The trend in country’s inflation rate

The low inflation rate coupled with stable Japanese currency makes it possible for citizens to purchase products both locally and internationally. Japan has been able to maintain its purchasing power relative to different currencies (Terada, Higashio & Iwasaki, 2008, para. 3-5). This underlines the reasons why Japan is one of the most favorable places for investors. With the country having a high percentage of income earning population and a stable currency, it implies that the population will be able to purchase foreign goods thus making it possible for foreign investors to get ready market in the country.

Trade and investment opportunities in Japan

Being the second world’s largest economy, Japan has possesses high opportunity for foreign direct investors. Unlike most of the countries, Japanese government has imposed limited official restrictions on incoming foreign direct investments. The government has gone further to an extent of removing most of the legal requirements that previously rocked out most of the foreign investors. Since the end of the Second World War, Japan has never experienced rapid economic growth as it currently experience. In addition, the government has made numerous reforms in its economic policies making it more attractive for foreign investors (Dubai Chamber, 2007, para. 1-4). Establishment of favorable economic policies in Japan paves way for investors to directly invest in the country.

Japanese government has come up with economic deregulations making it more attractive for investors. The number of business fields open to investors has significantly increased. Japan has not been left behind in this era of globalization. As a result, it has come up with policies allowing for foreign companies to participate in mergers and acquisition. These as well as cut down on cross-shareholding by domestic companies have given other investors a chance to open businesses in Japanese market.

As aforementioned, most of the Japanese workforce has embarked on working in different industries such as service industries and other light industries. This has led to low rate of production of agricultural products in the country. Being one of the most populace countries in the world, it means that there is high need for agricultural products in the country (Dubai Chamber. 2007, para. 6). Only thirteen percent of the country’s land is suitable for farming. This is not enough to supply the entire population with food. It is with this effect that Japan has been found to depend on imported agri-food. 60% of food consumed in the country is imported. Increase in the rate of aging population in Japan has led to high need for healthy food and organic products. Saskatchewan, being one of the main producers of these products has high opportunity of investing in Japanese market. In addition, demand for animal feeds, barley malt, cereals and pork is high in the country (Government of Saskatchewan. 2008, para. 1-3). The products not being produced in Japan leads to the country depending on imports. This gives potential producers of the products a ready market.

In most cases government regulations are seen as the main drawback to direct foreign investment. Countries come up with regulations that restrict foreign investors from venturing into their markets. Most of these regulations are aimed at protecting domestic industries from competition. Japanese government has eliminated most of the regulations that for many years rocked foreign investors out of the Japanese market. This has led to increase in the number of direct foreign investors venturing in service industry. Despite the government removing these regulations, there are still industries that foreign investors have not yet agreed to venture in. These include real estates, construction, medical services and civil engineering (European Commission. 2010, para. 3-6). The main reason why there has not been direct foreign investment in these industries is not due to presence of regulations that directly restricts foreign investors rather; some of the current investment regulations scare investors from investing in these industry.


Based on the analysis of the Japanese market, it is one of the markets with high potential for investors. Being one of the countries with a high number of income earners, it means that most of the people in the country are capable of purchasing products. Its stable currency coupled with favorable economic policies means that investors will be able to get returns from the market. Increase in the number of aging population in the country implies that in near future, Japan will face a shortage in the workforce. This will lead to the country depending on importation of most of the vital products. This gives potential exporters an opportunity to venture into this market.

Reference List

  1. Clenfield, J. & Ito, T. (2009). Japan GDP accelerates, easing risk of renewed slump.
  2. Dubai Chamber. (2007). Trade and investment opportunities for the UAE in Japan.
  3. European Commission. (2010). Trade: Japan. Web.
  4. Government of Saskatchewan. (2008). Export opportunities in Japan.
  5. Kapila, S. (2010). Japan Political instability and its strategic impact.
  6. Liping, X. (2007). The trends of Japan’s economy and foreign policy.
  7. Tatum, R. (1997). Japan’s economic system.
  8. Terada, T., Higashio, N. & Iwasaki, J. (2008). Recent trends in Japanese foreign-exchange margin trading.
  9. Thomas White. (2008). Japan: A spirit to excel.
  10. United States Library of Congress. (2007). Employment and labor relations. Web.
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