Embed This Data
- GDP (PPP):
- $4.4 trillion
- -0.7% growth
- -0.2% 5-year compound annual growth
- $34,740 per capita
- Inflation (CPI):
- FDI Inflow:
Japan’s economic freedom score is 71.8, making its economy the 24th freest in the 2013 Index. Its score is 0.2 point higher than last year, with improvements in fiscal freedom, freedom from corruption, and monetary freedom largely offset by declines in management of government spending and labor freedom. Japan is ranked 6th out of 41 countries in the Asia–Pacific region.
The Japanese economy benefits from relatively sound levels of economic freedom in all areas. The foundations of economic freedom have been relatively well institutionalized, supported by an effective judicial framework and a relatively low level of perceived corruption.
However, Japan’s overall record in advancing economic freedom is patchy, and its score is lower today than it was in 1995. The financial sector, though modern and well developed, remains subject to growing political interference. Seniority-based traditional labor practices persist, constraining mobility. A monetary policy aimed at preserving low interest rates has reduced any acute concern over Japan’s large debt burden, but it has also limited the political motivation to implement urgently needed fiscal reform. Japan continues to fall behind other neighboring economies in pursuing free trade agreements.
After 55 years of Liberal Democratic Party rule, the Democratic Party of Japan captured both houses of parliament in 2009 and installed Yukio Hatoyama as prime minister. Hatoyama resigned abruptly in June 2010 and was succeeded by Finance Minister Naoto Kan, who was replaced in September 2011 by Yoshihiko Noda. The March 2011 earthquake and tsunami further strained an economy already struggling for two decades with slow growth and stagnation. Prime Minister Noda has strived to include Japan in the Trans-Pacific Partnership to stimulate the economy but faces strong resistance at home. Successive prime ministers have been unable or unwilling to implement necessary fiscal reforms. The economy is about the same size as it was in 1992.
The solid judicial framework provides secure protection of real and intellectual property. The court system is independent of political interference but lacks efficiency. Obtaining and protecting patents and trademarks can be time-consuming and costly. The courts do not discriminate against foreign investors, and contracts are respected. A relatively modest level of corruption has been one of Japan’s key institutional assets.
The top income tax rate is 40 percent. The government lowered the corporate rate to 25.5 percent, but local taxes and an enterprise tax can increase that significantly. Other taxes include a value-added tax and an estate tax. The overall tax burden equals 28.8 percent of total domestic income. Government spending is 42.8 percent of GDP, with budget deficits hovering around 10 percent of GDP. Public debt is over twice the size of the economy.
With no minimum capital required, business formation takes less than 10 procedures. However, dynamic entrepreneurial growth is discouraged by lingering regulatory rigidities, including burdensome licensing requirements. A propensity for lifetime employment guarantees and seniority-based wages hurts productivity and impedes the development of a more flexible labor market. Inflation has been minimal.
The trade-weighted average tariff rate is 1.6 percent, but there are layers of non-tariff barriers. Foreign investment is formally welcome, and inward investment is subject to few restrictions. However, overregulation and a slow court system inhibit foreign acquisition of domestic firms. The financial sector is subject to political influence and lacks dynamic growth. Reform of the state-owned postal savings system has been derailed since late 2009.