In the image
Some flash ideas about Japan, image created by Artificial Intelligence
EXECUTIVE SUMMARY
The purpose of this political risk report is to assess whether Japan is a suitable destination for investors. Through an analysis of its economic, political, geopolitical and industry, trade and energy landscapes, it establishes the risks posed to the stability of the country.
Regarding the economic forecast, the report finds that Japan will experience slow economic growth in the short and medium term. Real GDP growth is likely to grow by 1% annually from 2025 to 2029 while inflation is expected to remain at around 2% during the same period. Additionally, it is expected that Japan will effectively reduce its public debt from 251.2% GDP in 2024 to 245% GDP by 2029. Japan's future will be determined by its ability to expand production in high-tech and green industries, while combating imminent population decline and an aging workforce.
In relation to the political outlook, political instability is likely to persist in the short to medium term as the LDP-Komeito coalition lost its majority in the House of Representatives in the October elections, signaling prolonged legislative deadlock. The rise in support for the main opposition party, CDPJ, will pose significant challenges to the LDP's diary moving forward as both the CDPJ and the LDP scramble to obtain outside-party support. With immigration in the political diary, short term labor shortages are likely to continue to be addressed while long term solutions will be conditioned by the evolving political landscape.
Returning to a trade surplus in the medium term will depend on Japan's ability to engage with the ASEAN countries and foster its strategic partnerships in the region. As it pertains to FDI, inward FDI is likely to remain low due to Japan's systemic reluctance and aversion to external investment, while outward FDI is likely to increase, particularly in South and South-East Asia. Concerning energy prospects, as Japan plans to decarbonize its energy mix, nuclear and solar energy provide investment opportunities.
In terms of geopolitical risk, China remains Japan's main trading partner, while the US is its main ally. Balancing both relationships will determine the country's stability in the short to medium term. As regional tensions increase and security concerns mount, Japan is likely to bolster its defense industry and adopt a more assertive military stance, as evidenced by its goal to achieve military spending of 2% of GDP by 2027.