Japan’s Economic Growth in 2023: A Closer Look at Key Factors

Japan is a country known for its economic prowess and technological feats. Its economy stands as one of the most developed in the world, with its distinct characteristics. The country is among the world’s top trading partners, exporting its products to over 150 states. In addition, Japan is actively engaged in international economic organizations such as the World Trade Organization (WTO) and the Asia-Pacific Economic Cooperation (APEC).

Industry plays a crucial role in the Japanese economy. Japan leads globally in producing automobiles, electronics, chemicals, and other goods. The Japanese industry excels due to its high level of automation and use of advanced technologies, enabling to produce top-tier products at competitive prices.

However, Japan’s economy does encounter challenges. A significant one is its high dependence on exports, making it vulnerable to global economic changes. Moreover, recent years have seen problems in the fields of labor and employment, including job cuts, decrease in the workforce and rising unemployment. The latter can be attributed to migration from rural to urban areas. Additionally, environmental pollution issues could impact investment and hinder economic growth. Recent political changes in Japan, such as changes in government and electoral reforms, may also add to the country’s economic stability.

Despite these hurdles, Japan’s economy continues to move forward. In recent years, the Japanese government has implemented measures to boost economic growth, such as increasing investment in infrastructure and education, as well as improving conditions for small and medium-sized businesses.

Japan consistently invests in technology and innovation, which contributes to the economic development. However, it can also lead to increased research and development costs, potentially reducing competitiveness in the global market. The economy has lately seen growth, although it has been somewhat uneven, influenced by export earnings and investments in infrastructure.

All these factors ultimately affect the exchange rate of the Japanese Yen (USD JPY). The rate carries weight with international investors and businesspeople working with Japan, having impact on the value of Japanese assets like stocks and real estate, along with the prices of Japanese goods sold abroad.

It’s worth noting that the USD JPY currency pair ranks second in terms of trading volume, following only the EUR USD, which is known for its liquidity.

Throughout 2023, there has been an upward trend in the exchange rate following a correction last year. The suggested growth of the Gross Domestic Product (GDP) could lead to an even bigger increase in the exchange rate.

However, the primary factor to watch is the inflation rate. The market has frozen in anticipation, with almost all traders preparing to sell. Lingering concerns lean towards weakening, aligning with bearish sentiments.

Japan’s struggle with inflation is somewhat of a running joke. Despite being highly developed, it isn’t immune to inflation woes. Between 1985 and 2014, inflation rate in Japan lagged behind other developed countries, prompting low-interest rates and low returns on investment assets. However, starting 2020 inflation began to rise and reached unprecedented levels in 2022.

A catalyst for Japan’s inflation is low labor productivity coupled with high labor costs. To combat inflation, the Japanese government initiated various measures, including lowered import taxes and increased infrastructure spending. Structural reforms were introduced to reduce reliance on foreign investors while boosting domestic investor participation.

Nevertheless, despite these efforts, inflation continues to rise. In 2022, inflation in Japan reached 4.3%, marking the highest level in 25 years. Factors also include elevated energy and commodity prices, increased spending on social welfare and healthcare.

Thus, grappling with inflation remains an ongoing challenge for Japan. The government must persist in financial system reforms, reduce reliance on external investors, enhance labor productivity, and curb labor costs.

Returning to the USD JPY rate, from a technical standpoint, concerns about a decline are well-founded. The price is approaching the historical resistance of 147.00-150.00.

Roughly speaking, this level is critical for all market participants. Its breakdown will mark a new stage in the development of the currency pair and will open the path for systematic growth.

Conversely, a downward bounce would maintain a balance between supply and demand, consolidating the price within a horizontal channel around 127.00.

So watch it closely if you see Japanese market as a great addition to your portfolio. However, do not forget that technical and fundamental analyses should go prior to any investment decisions.