Japan: Still an Asian Power?

Translated by Benedetta Morandini

Japan, historically one of the world's leading economic powers, ranked as the third-largest economy globally and the fourth between 1990 and 2012, has long held a position as a regional power in Asia. Its influence extends to Southeast Asian countries, and its international ties grant it a significant role in the global community.

However, this economic giant has recently faced challenges that have slowed its growth.

The Land of the Rising Sun, renowned for its leadership in technological innovation and the manufacturing sector, entered a period of deep recession at the end of last year, losing its title as the world's third-largest economy to Germany (which now trails behind the U.S. and China on the global podium).

While Japan's economy showed signs of recovery in the first quarter of 2023, with a GDP increase of 0.4% compared to the previous quarter (+1.6% compared to the same months in 2022) following the pandemic period, the expected growth did not materialize in the second and third quarters. By the last quarter, the country had slipped into negative territory, with GDP recording a -0.4%, largely due to weak demand from neighboring China, which has become increasingly self-sufficient in its domestic production.

All hopes for growth, initially projected at 1.8% for 2023 and 0.9% for 2024, have faded as Japan entered a period of severe recession in early 2024.

Negative trends have also emerged regarding public debt. After reaching a record high of over 1,286 trillion yen (more than 8 trillion euros) in 2023, approximately twice the country’s GDP, public debt is expected to increase further by the end of 2024, exacerbating the recession.

Additional shocks to Japan's economy have come from its national currency, the yen, which significantly weakened throughout 2024. Despite market expectations for a tightening of monetary policy by the Bank of Japan (BoJ) after the yen had already reached a record depreciation against the dollar in April, the yen briefly worsened this record on June 27, 2024, hitting its lowest value since 1986.

Although the yen showed slight signs of recovery in July and August, a new blow to the Japanese economy came in the first week of August when the Japanese stock index, the Topix, dropped by 12%. These sharp movements have had, and continue to have, implications not only for Japanese investors and companies but also as a source of further volatility in the already nervous global markets. One certainty is the flight of foreign investments due to the volatility of Japanese financial markets. Additionally, Japan is finding it increasingly difficult to attract foreign workers, who are now crucial for supporting the economy. It is no coincidence that on April 26, the central bank reduced its GDP growth forecast for 2025, lowering it from 1% to 0.8%.

Numerous policies are necessary for the country's economic recovery, both economically and financially, to ensure that Japan can emerge from this recession and return to the top ranks of the global economy.

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