Economy of Japan


has a highly developed mixed economy, often referred to as an East Asian model. According to the IMF forecast for 2025, it will be the fourth-largest economy in the world by nominal GDP and the fifth-largest by purchasing power parity by the end of the year. It constituted 3.7% of the world's economy on a nominal basis in 2024. According to the same forecast, the country's nominal per capita GDP will be $56,440. Due to a volatile currency exchange rate, Japan's nominal GDP as measured in American dollars fluctuates sharply.
A founding member of the G7 and an early member of the OECD, Japan was the first country in Asia to achieve developed country status. In 2024, Japan was the sixth-largest in the world as an importer and eight-largest as an exporter. The country also has the world's fourth-largest consumer market. Japan used to run a considerable trade surplus, but the decline of the manufacturing sector since the 1980s and increased fossil fuel imports after the Fukushima nuclear accident in 2011 have changed this trend in recent years. Being the world's largest creditor nation, Japan has a considerable net international investment surplus. The country has the world's second-largest foreign-exchange reserves, worth $1.4 trillion. Japan has the third-largest financial assets in the world, valued at $12 trillion, or 8.6% of the global GDP total as of 2020. Japan has a highly efficient and strong social security system, which comprises roughly 23.5% of GDP. The Tokyo Stock Exchange is the world's fourth-largest stock exchange by market capitalisation as of 2025.
Japan has a highly service-dominated economy, which contributes approximately 70% of GDP, with most of the remainder coming from the industrial sector. The country's automobile industry, which is the third largest in the world, dominates the industrial sector, with Toyota being the world’s largest manufacturer of cars. In 2022, Japan spent around 3.7% of GDP on research and development. As of 2025, 38 of the Fortune Global 500 companies are based in Japan.
Long having been an agricultural country, it has been estimated that Japan’s economy was among the top ten in the world by size before the industrial revolution started. Industrialisation in Japan began in the second half of the 19th century with the Meiji Restoration, initially focusing on the textile industry and later on heavy industries. The country rapidly built its colonial empire and the third most powerful navy in the world. After the defeat in the Second World War, Japan’s economy recovered and developed further rapidly, primarily propelled by its lucrative manufacturing exporting industries. It became the second largest economy in the world in 1988 and remained so until 2010, and on a nominal per capita basis, the most high-income among the G7 countries in the 1980s and 1990s. In 1995, Japan’s share of the world’s nominal GDP was 17.8%, reaching approximately 71% of that of the United States.
Driven by speculative investments and excessive lending, the Japanese asset price bubble of the early 1990s burst, triggering a prolonged period of economic stagnation marked by deflation and persistently low or negative growth, now known as the Lost Decades. From 1995 to 2023, the country’s GDP fell from $5.5 trillion to $4.2 trillion in nominal terms. At the turn of the 21st century, the Bank of Japan set out to encourage growth through a policy of quantitative easing, with the central bank purchasing government bonds at an unprecedented scale to address the persisting deflationary pressure. In 2016, the Bank of Japan introduced a negative interest policy to stimulate economic growth and combat persistent deflationary pressure. A combination of domestic policies and global economic conditions helped the country achieve its 2% inflation target, leading to the conclusion of the policy in 2024.
As of 2021, Japan has significantly higher public debt than other developed nations, at approximately 260% of GDP. 45% of this debt is held by the Bank of Japan, and most of the remainder is also held domestically. The Japanese economy faces considerable challenges posed by an ageing and declining population, which peaked at 128.5 million people in 2010 and has fallen to 122.6 million people in 2024. In 2024, the country's working age population consisted of approximately 59.6% of the total population, which was the lowest rate among all the OECD countries. According to 2023 government projections, the country's population will fall to 87 million by 2070, with only 45 million of working age.

History

The economic history of Japan is one of the most studied. Major milestones in modern Japan's economic progress include:
The beginning of the Edo period coincides with the last decades of the Nanban trade period, marked by intense interaction with European powers. Japan built its first Western-style warships, such as the San Juan Bautista, and commissioned around 350 Red Seal Ships for intra-Asian commerce. Japanese adventurers, such as Yamada Nagamasa, were active throughout Asia.
To eradicate Christian influence, Japan entered a period of isolation called sakoku in the 1630s, which led to economic stability and mild progress. In the 1650s, Japanese export porcelain production increased significantly due to a civil war in China, mainly in Kyushu. This trade dwindled by the 1740s under renewed Chinese competition but resumed after Japan’s mid-19th century opening.
Economic development during the Edo period included urbanisation, increased commodity shipping, and expanded domestic and foreign commerce. The construction trades, banking facilities, and merchant associations flourished. Daimyō-led authorities oversaw rising agricultural production and rural handicrafts. By the mid-18th century, Edo had a population of over 1 million, while Osaka and Kyoto each had more than 400,000 inhabitants, becoming centres for trade and handicraft production. Rice, the economy’s base, was taxed at about 40% of the harvest and sold at the fudasashi market in Edo. Daimyō used forward contracts similar to modern futures trading to sell rice before harvest.
During the sakoku period, Japan studied Western sciences and techniques through Dutch traders in Dejima, including geography, medicine, natural sciences, astronomy, and mechanical sciences. Japan reopened its economy to the West after being pressured by the United States twice in 1853 and 1854.

Meiji and Imperial Period (1868–1945)

Since the mid-19th century, after the Meiji Restoration, the country was opened up to Western commerce and influence and went through a period of economic development that extended through to the First World War. Economic developments of the prewar period began with the "Rich State and Strong Army Policy" by the Meiji government. During the Meiji period, leaders inaugurated a new Western-based education system for all young people, sent thousands of students to Europe and the United States, and hired more than 3,000 Westerners to teach modern science, mathematics, technology, and foreign languages in Japan. The government also built an extensive railway network, improved roads, and inaugurated a land reform program to prepare the country for further development.
To promote industrialisation, the government decided that, while it should help private business to allocate resources and to plan, the private sector was best equipped to stimulate economic growth. The greatest role of government was to help provide good economic conditions for business. In short, government was to be the guide and business the producer. In the early Meiji period, the government built factories and shipyards that were sold to entrepreneurs at a fraction of their value. Many of these businesses grew rapidly into the larger conglomerates such as Mitsubishi. Government emerged as chief promoter of private enterprise, enacting a series of pro-business policies.

Post-war period (1945–1991)

Japan underwent significant economic transformation and rapid recovery and growth, emerging from the devastation of the Second World War to become a global economic powerhouse. The immediate post-war period saw Japan slowly recovering as a democratic nation under the Allied Occupation. The Korean War, which happened in its now divided former colony, boosted the economy, as Japan served as a major supply hub for U.S. forces. By the 1950s and 1960s, Japan’s economy had entered a period of high growth, often referred to as the 'Japanese Economic Miracle'. Key factors in this growth included government-industry cooperation, a strong work ethic, advanced technology, and a focus on export-oriented manufacturing. Japan’s economy diversified from textiles to steel, shipbuilding, and eventually electronics and automobiles, with companies such as Toyota, Sony, Hitachi and Honda becoming household names worldwide.
In 1968, Japan became the world’s third-largest economy then the second largest in 1988, surpassing the Soviet Union, a position it held until it was surpassed by China in 2010. The government played a crucial role through policies that promoted industrial expansion and technological advancement. Japan’s emphasis on quality control and continuous improvement further boosted its international competitiveness. By the 1980s, Japan was leading in a wide range of industries, including automotive and consumer electronics, and was known for its formidable trade surplus and wealth. However, the late 1980s also saw the infamous Plaza Accord and the formation of an asset price bubble, with inflated real estate and stock market prices, setting the stage for the economic stagnation of the 'Lost Decades' that followed.