Japan’s recovery: Geography lends a helping hand
1 June 2010
Over the past year, Japan’s economic recovery has outpaced those of all other major industrialised economies. In the first quarter of 2010, GDP growth accelerated to 1.2%Q/Q, the fourth consecutive quarter of positive growth, leaving output more than 4½% higher than its level a year earlier. This solid pace of recovery – admittedly from a low base – is thanks to two main drivers. First, successive budgetary stimulus packages provided a boost to consumption, as households took advantage of the fiscal incentives to spend on durable goods. But most importantly, net exports contributed about three quarters of growth over the past year.
GDP growth
Source: Cabinet Office
Japan’s export performance is arguably all the more remarkable given the hit to competitiveness from the sharp appreciation of the yen since late 2007 – up about 17% against the Chinese yuan, 25% against the US dollar, about 50% against the euro and more than 70% against sterling. Therefore, some of the credit must go to Japan’s highly competitive manufacturing sector, which, not least by cutting labour costs, has been able to boost both sales and profits. But Japan has also benefitted from an accident of geography, which has allowed it to benefit disproportionately from the emergence of China and other Asian economies as drivers of global growth.
Share of exports to China and emerging Asia
Source: IMF and Daiwa Capital Markets Europe Ltd.
So while Japan’s exports to all key destinations have seen a striking improvement over the past year, those to Asian markets have shown by far the greatest improvement, rising more than 45%Y/Y in April back close to their pre-recession levels. As a result, while one decade ago, the US was by far Japan’s number one export market – accounting then for about one third of all exports – its share has now halved. And the importance of the US has been far surpassed by China, which has more than doubled its share of Japanese exports to about one quarter, with the remainder of Asia now accounting for a further 30% of trade.
Export volumes by destination 
Source: MoF and Daiwa Capital Markets Europe Ltd.
With recent growth in emerging Asia having been underpinned by strong domestic demand, supported by accommodative monetary and fiscal polices and solid economic fundamentals, that region should continue to record the world’s strongest growth rates in coming quarters. And so while we expect the pace of domestic demand to slow, Japanese GDP growth should be maintained through the remainder of 2010 by continued solid export growth. And while the recent bout of market instability represents a downside risk to growth, with only 12.5% of its exports going to the EU, Japan is better placed than most other major economies to withstand a double-dip in the euro area.
Moreover, the performance of the emerging Asian economies should continue to outstrip that of their peers for years and probably decades to come. Therefore, despite all Japan’s structural problems – including an ageing population, very low productivity growth in its non-tradable sector, and the world’s largest stock of government debt – Japanese exporters should continue to benefit from a rising regional economic tide for years to come. If the Japanese government can additionally deliver the reforms the economy is so desperately crying out for, the medium-term outlook for the Japanese economy need not necessarily prove as bleak as many commentators currently fear.
Chris Scicluna, Deputy Head of Economics
Emily Nicol, Junior Economist
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