Japan’s recent export performance offers a glimmer of hope amid broader economic uncertainties. In October 2024, Japan’s exports rose by 3.1% compared with the same month a year earlier, marking a significant rebound after the sharp 1.7% fall in September that had set a 43-month low.
This unexpected increase exceeded economists’ expectations of a 2.2% rise, suggesting that Japan’s export-driven economy is on a recovery path.
But despite this positive news, the country faces a series of challenges and risks that will shape its economic trajectory in 2025.
For global investors, Japan presents both a compelling case for growth in certain sectors and a complex set of risks, particularly in relation to global trade dynamics, domestic demographic trends and fiscal policy.
While Japan’s export figures have improved, the broader trade balance presents a more concerning picture.
The country’s imports also saw a modest rise of 0.4%, defying expectations of a 0.3% decline, pushing Japan’s trade deficit to 461.2 billion yen ($2.98 billion) in October. This marks an expansion from the previous month’s revised deficit of 294.1 billion yen, and a wider gap than the 360.4 billion yen forecasted by economists.
Despite the boost in exports, the trade deficit underlines the continued structural challenges within Japan’s trade dynamics, as the country relies heavily on importing raw materials and energy while exporting finished goods.
A key bright spot in the export data was Japan’s strong performance in the Middle East, where exports surged by 35.4% compared with October 2023.
This suggests a potential diversification of Japan’s trading partners, although the majority of its exports still rely on markets in Asia and North America.
Yet as the global economy faces growing uncertainties, Japan’s future trade performance will largely depend on global demand and its ability to face external trade risks, particularly the policies of the US.
Trade risks: US policies under Trump
One of the biggest external risks is the potential fallout from US policies under President-elect Donald Trump. Japan’s economy, deeply integrated into global supply chains and highly dependent on exports, could face substantial disruptions if the new administration imposes more tariffs or engages in a broader trade war with China.
Japan’s trade relationship with the US is critical, especially in sectors such as automobiles, electronics, and machinery, where Japan holds a competitive advantage.
However, if Washington moves toward more protectionist policies, or if tensions between the US and China escalate further, Japan could face slower export growth and higher costs for raw materials.
In particular Japan’s reliance on China as a key trading partner means that any further deterioration in relations between the world’s two largest economies could significantly disrupt Japan’s supply chains and reduce demand for its products in both markets.
For global investors this, of course, creates an uncertain environment.
Demographic and labor market challenges
Internally, Japan continues to struggle with significant demographic challenges that are likely to limit its economic growth potential. Japan’s aging population and declining birth rate have been well-documented, and by 2025, these trends are expected to worsen further.
The country’s workforce is shrinking, leading to concerns over labor shortages and a rising dependency ratio. As the population ages, the demand for healthcare and pension services will increase, placing additional strain on Japan’s fiscal policies.
The Japanese government has made some efforts to mitigate these challenges, including relaxing immigration policies to attract skilled workers and encouraging older workers and women to participate in the workforce.
But, to date, these measures have had limited success in reversing the demographic decline. For investors, this means that Japan’s potential for robust domestic consumption and labor-driven growth is constrained. Instead, investors are going to look to sectors that can mitigate workforce shortages, such as robotics, automation and AI, which Japan has been at the forefront of developing.
In addition to demographic pressures, Japan’s consumption patterns have been influenced by an aging population, with a growing preference for products and services tailored to older individuals. Sectors such as healthcare, biotech, and elder care technologies are likely to see growth, while traditional consumer goods may face stagnation as Japan’s population decreases and ages.
The BoJ’s role
The Bank of Japan (BoJ) will remain a major player in Japan’s economic landscape in 2025.
The central bank has maintained ultra-loose monetary policies for years, including negative interest rates and massive asset purchases, in a bid to stimulate inflation and boost economic growth. But these measures have not led to the desired results, with Japan still battling low inflation and sluggish growth.
In 2025, the BoJ will likely continue its accommodative stance, with interest rates remaining low and asset purchases ongoing.
While this supports economic activity in the short term, Japan remains vulnerable to global interest rate hikes, particularly in the US If global bond yields rise or if the BoJ begins to taper its monetary stimulus, Japan’s financial markets could face volatility, especially in the bond market.
For global investors, the BoJ’s policies will have a significant impact on the yen. A weak yen generally benefits Japan’s exporters, making their products more competitive abroad.
As global investors look to 2025, Japan presents both considerable risks and significant opportunities.
The key will be to monitor developments in global trade policies, domestic labor market reforms and monetary policy actions from the BoJ.
Nigel Green is CEO and founder of deVere Group.