Japan

COUNTRY ANALYSIS REPORT
Japan
In-depth PESTLE Insights
Publication Date: May 2010
OVERVIEW Catalyst
This profile analyzes the political, economic, social, technological, legal and environmental structure in Japan. Each of the PESTLE factors is explored on four parameters: current strengths, current challenges, future prospects and future risks.
Summary
Key findings
Political change hampering relations with the US; while government is determined to curb wasteful expenditure The historic electoral victory for the DPJ has not only galvanized Japanese politics, but also renewed debate over the future of the US-Japan relationship. From the beginning of DPJ taking over the government in September 2009, the government has not been able to provide clear stance on foreign and defense policy. Furthermore, Prime Minister Hatoyama during March-April 2010 got into a difficult situation over a dispute with the US over a plan to relocate a US Marine base to a less crowded part of Okinawa. The situation gets more complicated as he approaches a self-imposed deadline at the end of May 2010. The dispute has frayed ties with the US. As a part of the budget screening process initiated by the DPJ-led administration, the government has set up a panel named the Government Revitalization Unit in November 2009. The government panel conducted the first budget screening session to review wasteful spending for the fiscal 2010 budget proposals. Economic situation worsens with deflation, and fiscal condition deteriorates Japan is facing its worst economic challenge since the World War II. The economic conditions have deteriorated since 2007, when the economy recorded a growth rate of 2%. It plunged into a recession in 2009 with a negative growth rate of 5.4%. The CPI inflation rate was negative during 200205. It increased to 0.3% in 2006, but fell to 0.10% in 2007. However, it registered an increase in 2008 to reach 1.75%. The economy is currently going through a deflationary phase and is
Japan: Country Analysis Report In-depth PESTLE Insights

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Published 05/2010 Page 1
Overview
expected to remain in it through most of 2010. Deflation reached 1.7% in 2009. The deflationary pressure and lack government stimulus are currently leading to decreased consumption and industrial losses. Moreover, the government finances of Japan are in a bad shape. Japan's parliament has approved a record JPY1 trillion ($10.6 billion) budget for the fiscal year from April 2010, with an all time high of JPY 44.3 trillion ($469 billion) in new bond issuance underlining the countrys dire financial position. The government is not initiating any stimulus package as there is a risk of a double dip recession. Although the Japanese government had targeted for a balanced budget by 201112, deteriorating finances will make it increasingly difficult to achieve the target. Improving social expenditure, however, declining labor force continues to be a problem A major portion of Japans national budget is set aside for social welfare initiatives. Around $192 billion was spent on supporting the country's rapidly ageing population in 2008. This is an increase of 3% from 2007. Of the three main priorities, two focus on the social sector: regional vitalization, and improvement of the social safety net for citizens. In March 2010, the lower house of parliament in Japan passed a bill that will make tuition free for public high school students and will provide allowances to families raising children. Under the bill, households with children of junior high school age (16) or younger will be entitled to JPY13, 000 ($144) per month to help with child-rearing costs. A study by a research team in the Ministry of Health, Labor and Welfare found that Japan's labor force will decline by 4.4 million workers by 2016, if measures are not taken to hire more women and senior citizens. This decline reflects a continuing decrease in the birthrate. The study found that, by 2030, the labor force will decline by about 10.7 million. This drastic reduction in the labor force will have serious consequences with regards to the overall productivity and output. The declining labor force will have negative ramifications on the nations economy. Strong knowledge base, but wage costs are high Japan is historically known to be a land of innovation. Japan has the world's third largest budget for R&D, at $165 billion, and was home to over 677,000 researchers in 200708. Japanese researchers have continuously won Nobel prizes from 1973 to 2002. Japan is a leading nation in terms of scientific research, technology, machinery and medical research. Over the years, the country has developed many cutting edge technologies in advanced fields like robotics. Japans large R&D budget, talent pool of researchers and continual innovation in advanced areas such as robotics constitute its strong knowledge base. But, Japan has the highest wage costs in the world in technological sectors, and tops the list with an average annual salary of more than $86,000. Japan is followed by Australia and the US, with average annual salaries of around $80,000 and $75,000, respectively. Rising wage costs along with the emergence of low-cost countries such as China and India is eroding the competitiveness of Japan in terms of scientific research. New laws to boost M&A, but human rights violations persist The new laws pertaining to merger and acquisition (M&A) have been of great advantage to the corporate community in Japan. These laws allow foreign companies to buy Japanese companies with their own shares, reducing cash exchanges. This will enable Japanese holdings to obtain the shares of the foreign company. These laws will enable foreign firms that are looking to expand into high-growth industries such as pharmaceuticals and fine chemicals. It will also introduce greater flexibility into M&A transactions, since companies will no longer need to pay cash and thus save on interest charges. The move is expected to fuel greater M&A activity in Japan, especially in industries that are opening up and that offer attractive

Overview
returns. However, the human rights record of Japan continues to be a cause of concern. They are mainly due to the faulty criminal justice system and especially the right of the Japanese police to detain suspects for a long period. Although torture is rarely reported, it has been used as a means to extract confessions under pressure. Furthermore, there have been problems relating to the social and legal handling of minorities. Moreover, people of Korean or Chinese ancestry, along with other foreign residents, face differing degrees of discrimination. There is an urgent need to come up with better laws to protect the basic human rights especially of the minorities. Improving water quality, however, air pollution continues to remain a challenge Japan has effective processes as regards water quality management systems due to the establishment of Environmental Quality Standards (EQS). Japan's achieved an EQS of 99.3% in 2004 for cadmium, which is the highest rate achieved by the country. However, standards set for protecting the environment were accomplished at slightly lower rates. The Biological Oxygen Demand (BOD) level is one such standard set for measuring the organic contamination in water. In Japan, its EQS remained at 85.2%. The EQS of dangerous elements such as cadmium improved, however, the BOD continued to remain stagnant at 85.2%. Nevertheless, Japan continues to be dogged with reasonably high level of air pollution. According to the US Environmental Protection Agency (EPA), readings between 101 and 150 are usually considered unhealthy, however, the pollutant levels in Japan do not pose acute or immediate health hazard. Carbon dioxide emissions have steadily been growing without showing signs of relenting. The government has been taking measures to reduce the emissions of carbon dioxide and other pollutants, but improvements are occurring at a sluggish pace. PESTLE highlights Political landscape Many of Japan's politicians belong to families whose members have been at the helm at one time or other, which is seen by the Japanese people as undercutting the egalitarian nature of democracy. Japan has been working towards improving ties with China and South Korea. However, its relations with North Korea remains strained. Economic landscape Japans foreign exchange reserves climbed to an all-time high of $1.04 trillion at the end of March 2010. The countrys current account surplus in February 2010 rose by 29.6% from a year earlier to JPY1.471 trillion ($22 billion), underpinned by growing demand for Japanese products overseas. Social landscape The government has started several initiatives including Angel Plan, Nursing Care Insurance Law, Child Allowance Law, Childcare Leave Law and Child Welfare Law to alleviate the declining birth rate. The Japanese government is planning to build compact cities that reduce the distances between offices and homes, and avoid traffic congestion prevalent in larger cities.

Overview
Technological landscape Japan leads the world in terms of production and use robots, possessing more than half (402,200 of 742,500) of the world's industrial robots used for manufacturing. The Japanese mobile phone market generated total revenues of $13.6 billion in 2008, representing a compound annual growth rate (CAGR) of 2% for the period spanning 2004-08. Legal landscape This corporate income tax in Japan is higher than most of the other developed countries. For the corporates, total taxes, inclusive of National Corporation and local enterprise taxes add up to a combined burden of 40.87%. Japan has a unique prosecution system in the developed world. Of criminal defendants convicted in Japan, 99% are convicted following their own confession. Environmental landscape In January 2010 Japan registered with the United Nations its goal of slashing greenhouse gas emissions by 25% from 1990 levels by 2020 on the condition that all major emitters commit to ambitious targets. In 2009, however, the country managed to lower its CO2 emission levels from around 1224 million metric tons in 2008 to around 1202 million metric tons.
Key fundamentals
Table 1:
Japan key fundamentals
2008
2009
2010
2011
2012
2013
2014
GDP, constant prices ($ billion) GDP growth rate (%) GDP, constant 2000 prices, per capita ($) Inflation (%) Exports, total as % of GDP Imports, total as % of GDP Mid-year population, (million) Unemployment rate (%) Doctors per 1000 people Mobile penetration (per 100 people)
5177.9 -0.4 40678.1 1.5 18.9 18.9 127.3 4.0 2.3 83.1
4896.8 -5.4 38533.8 -1.7 16.2 17.0 127.1 5.1 2.3 85.6
4967.3 1.4 39172.9 -0.8 16.7 16.9 126.8 5.4 2.3 88.0
5069.5 2.1 40082.9 0.1 17.7 17.4 126.5 5.3 2.4 90.3
5183.0 2.2 41101.4 0.6 18.2 17.9 126.1 5.1 2.4 92.6
5289.2 2.1 42083.5 0.8 18.7 18.5 125.7 4.9 2.4 94.8
5389.1 1.9 43036.3 0.9 19.1 19.2 125.2 4.8 2.5 96.9
Source: Datamonitor
DAT AMONITOR

Table of Contents
TABLE OF CONTENTS
Overview Catalyst Summary Key facts and geographic location Key facts Geographical location PESTLE analysis Summary Political analysis Economic analysis Social analysis Technological analysis Legal analysis Environmental analysis Political landscape Summary Evolution Structure and policies Performance Outlook Economic landscape Summary Evolution Structure and policies Performance Outlook Social landscape Summary Evolution Structure and policies Performance 1 1 1 9 9 10 11 11 12 15 19 23 28 31 35 35 35 38 43 44 45 45 45 47 50 62 64 64 64 64 67

Table of Contents
Outlook Technological landscape Summary Evolution Structure and policies Performance Outlook Legal landscape Summary Evolution Structure and policies Performance Outlook Environmental landscape Summary Evolution Structure and policies Performance Outlook APPENDIX Ask the analyst Datamonitor consulting Disclaimer 70 72 72 72 72 73 76 77 77 77 77 82 83 84 84 84 84 87 88 90 90 90 90

Table of Contents
TABLE OF FIGURES
Figure 1: Figure 2: Figure 3: Figure 4: Figure 5: Figure 6: Figure 7: Figure 8: Figure 9: Figure 10: Figure 11: Figure 12: Figure 13: Figure 14: Figure 15: Figure 16: Figure 17: Figure 18: Figure 19: Figure 20: Figure 21: Figure 22: Figure 23: Figure 24: Map of Japan Japan key political events since independence Japan key political figures Japan structure of government Japan current composition of the lower house of parliament Japan historical GDP growth Market capitalization of Tokyo stock exchange, 200108 GDP and GDP growth rate in Japan, 200213(Real GDP at constant prices) Sector specific GDP in Japan, 2009 Agriculture output in Japan, 200209 Industrial output in Japan, 200209 Services output in Japan, 200209 Current account position in Japan, 200108 Japans external trade , 200209 FDI inflow in Japan, 200208 Consumer price index and CPI-based inflation in Japan, 200213 Unemployment trends in Japan, 200213 Major religions in Japan as of 2008 Expenditure on healthcare in Japan, 200213 Expenditure on education in Japan, 200213 Growth of mobile and fixed line telephones in Japan, 200213 Number of internet users in Japan, 200213 Japan judicial structure Carbon dioxide emissions in Japan, 200213 10 36 38 39 41 47 49 51 52 53 54 55 56 57 59 60 62 66 68 70 74 75 78 88

Table of Contents
TABLES
Table 1: Table 2: Table 3: Table 4: Table 5: Table 6: Table 7: Table 8: Table 9: Table 10: Table 11: Table 12: Table 13: Japan key fundamentals Japan - key facts Analysis of Japans Political landscape Analysis of Japans economy Analysis of Japans social system Analysis of Japans technology landscape Average annual salaries for researchers across countries Japans R&D expenditure R&D personnel in Japan, 200212 Analysis of Japans legal landscape Analysis of Japans environmental landscape Mid-year population by age (millions) in 2009 International environmental treaties signed and ratified by Japan 4 9 12 15 19 23 25 26 27 28 31 65 87

Key facts and geographic location
KEY FACTS AND GEOGRAPHIC LOCATION Key facts
Table 2:
Japan - key facts
Country and capital Full name Capital city Japan Tokyo
Government Government type Head of state Head of government Constitutional monarchy with parliamentary government Emperor Akihito Prime Minister Yukio Hatoyama
Population
127.07 million
Currency
Yen
GDP per capita (PPP)
$32,600
Internet domain
.jp
Demographic details Life expectancy 82.12 years (total population) 78.8 years (men) 85.62 years (women)
Ethnic composition (2000 data)
Japanese 98.5% Others 1.5%
Major religion (2001 census)
Buddhism and Shintoism 84%, Christianity 1% and Other 15%
Country area
377,835 sq km
Language
Japanese
Exports
Transport equipment, motor vehicles, semi-conductors, and chemicals
Imports
Raw materials, fuels, food stuffs, textiles, and machinery
Source: CIA
DAT AMONITOR

Key facts and geographic location
Geographical location
Japan is located in Eastern Asia. It takes the form of an island chain between the North Pacific Ocean and the Sea of Japan, and is to the east of the Korean Peninsula.
Figure 1:
Map of Japan
Source: CIA The World Factbook
DAT AMONITOR

PESTLE analysis
PESTLE ANALYSIS Summary

Japan is one of the worlds largest economies with a very strong democratic set up. However, the Japanese political scene has been witnessing an impasse after the Democratic Party of Japan (DPJ) defeated the Liberal Democratic Party (LDP) in the upper house of the Diet. Subsequently, DPJ went on to win the elections in August 2009, by winning 308 seats out of total 480 seats in the lower house. The Japanese economy is facing a severe crisis in the form of mounting government debt, unemployment and a weak banking system. In 2008, the economy recorded a negative growth of 0.4, which declined further in 2009 to -5.4%. The economy is also being hit by the growing proportion of elderly people in the country. More than 20% of the population is now aged 65 or above. Consequently, the government has been trying to address the problems associated with ageing population, and has increased the budgetary allocation for the social-welfare sector. It has also implemented policies supporting and encouraging families to have more children. Japan is known all over the world for its advanced technological innovations. The country has been a pioneer in robotics and is now starting to build technologies that protect the environment. But the high wage cost of scientific personnel is a problem faced by the country. In contrast, developing countries like China and India not only provide low cost research facilities but also have low wages. The legal system of Japan is similar to that of Germany and the US. Having previously followed the Chinese system, it later switched over to a system that resembles German law. The judicial system is dogged by political interference and discrimination of minorities by the police officials, due to which there has been a recent move to adopt a new quasi-jury system. This would allow the general public to participate in judicial hearings, which could bring accountability to the system. The Japanese government has strong environmental policies and the implementation of policies in the country is well monitored. Due to rigorous implementation of policies, the level of environmental damage has reduced, emission levels have been under control and water quality has improved. The country is also undertaking and supporting many international projects to enhance the levels of environmental protection.

PESTLE analysis
Political analysis
Overview
Japan has a strong democratic setup with stable macroeconomic policies. The emperor is the head of state, but holds minimal power in the administration of government affairs. Besides economic crisis, Japans political landscape is characterized by instability. The ruling LDP suffered a defeat in the July 2007 elections and lost control of the House of Councillors, which is the upper house of the Diet. Subsequently, the DPJ won the elections held for the House of Representatives in August 2009. However, the new government is facing accusations for corruption scandals during the elections, which has lowered public support.
Table 3:
Analysis of Japans Political landscape
Current strengths Strong democratic setup High ranking on government effectiveness Emperor as figurehead
Current challenges Political change hampering relations with the US
Future prospects Political change hampering relations with the US E-government initiative
Future risks Deteriorating relations with North Korea Political inheritance Political scandals
Source: Datamonitor
DAT AMONITOR
Current strengths Strong democratic setup

Japan has a robust democratic setup. There are national-level and prefecture-level elections, all of which require citizens to exercise their vote. In the democracy rankings of 150 countries done by World Audit Group, Japan has been ranked at the 29th position in 2009, which is higher than any other Asian country. Japan ranks 1st on political rights and 2nd on civil liberties on the basis of the same survey. However, the country is lags behind in terms of corruption at 14th rank and with regard to press freedom it was placed in 20th position. The countrys highest rank in political rights among 150 countries proves the strength of democracy in Japan.
High ranking on government effectiveness

Besides sustaining high economic growth, Japan has also succeeded in the putting in place rules and regulations to enhance government effectiveness. According to, World Governance Indicators (2008), Japan was ranked at 89.1 percentile on government effectiveness, which is amongst the highest in the region. Government effectiveness measures

PESTLE analysis
the quality of public services, the quality of the civil services and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government's commitment to such policies. Japans rank is quite high, as successive governments from different political parties have broadly pursued similar economic policies, leading to stability in policy formulation and implementation. Similarly in terms of regulatory quality, Japans performance is impressive, with the government pursuing investor friendly policies. These indicators are reflective of Japans regulatory quality which matches those of other advanced economies.
Emperor as figurehead
Under the Japanese constitution, the emperor is the symbol of the state and unity of the people. The emperor of Japan was the commander of the armed forces until late 1945. However, the modern constitution, accepted in 1947, turned the president into a figurehead with no real powers. The constitution of Japan vests the total executive power with the cabinet and the prime minister. The prime minister is formally appointed by the emperor, but only with the consent of the National Diet. Most of the emperors duties can be exercised only after the advice and consent of the cabinet. The supremacy of the emperor has remained a key force in binding the Japanese together.
Current challenges Political change hampering relations with the US

The historic electoral victory for the DPJ not only galvanized Japanese politics, but also renewed debate over the future of the US-Japan relationship. From the beginning of DPJ taking over the government in September 2009, the government has not been able to provide clear stance on foreign and defense policy. Furthermore, Prime Minister Hatoyama during MarchApril 2010 got into a challenging situation over a dispute with the US over a plan to relocate a US Marine base to a less crowded part of Okinawa as he approaches a self-imposed deadline at the end of May 2010. The dispute has frayed ties with the US and fanned doubts among voters about Hatoyama's leadership skills. The hostile start of the new government is currently posing doubts over countrys future relations with the US.
Future prospects Government Revitalization Unit

As a part of the budget screening process initiated by the DPJ-led administration, the government has set up the Government Revitalization Unit in November 2009. The panel is slated to look into major independent administrative institutions such as the Japan International Cooperation Agency that coordinate the nation's official development assistance. The government panel conducted the first budget screening session to review wasteful spending for the fiscal 2010 budget proposals. The panel is also expected to look into various other economic institutions in the country in the near future.
E-Government initiative
In March 2010, the Japanese government announced its plans to sign a Memorandum of Understanding (MOU) with the South Korean government to establish an e-government system in the country. This tie up came to a consensus after the Japanese Security Ministry was convinced with South Koreas e-government technology. The South Korean government expects the agreement to pave the way for South Korean IT companies to partake in Japans project to establish an e-

PESTLE analysis
government system. Furthermore, the e-government system is also expected to bring in greater transparency in to Japanese politics with government offices being virtually connected throughout the country.
Future risks Deteriorating relations with North Korea

Japans relations with North Korea have been worsening. North Korean aspirations to join the exclusive club of countries with nuclear weapons has been worrying both Japan and the US. The already poor relations received a further setback when North Korea launched a missile across the Japanese archipelago in April 2009. Japan participates in regular talks on ending North Korea's nuclear ambitions. In 2007, Japan refused to provide assistance to North Korea, until the successful resolution of the abduction issues. The Japanese government alleges that around 17 Japanese citizens were abducted by the North Korean government agents from 197783. Later on in August 2008, following North Koreas promise to reinvestigate those cases, Japan entered into an agreement with North Korea. However, North Korea has failed to implement the agreement. Such troubled relations in the archipelago pose potential threat for the country. Furthermore, the Japanese government extended sanctions against North Korea in early April 2010, citing lack of progress on nuclear talks.
Political inheritance
Many of Japan's politicians belong to families whose members have been at the helm at one time or other. Almost one third of Japanese parliament members belong to such families. Former Prime Minister Yasuo Fukuda's father also held the position, and Fukuda's predecessor was a prime minister's grandson. The fourth generation of the Hatoyama family has two brothers who hold senior positions in rival parties: Kunio, the former justice minister, and his older brother Yukio is the current prime minister of the country from the DPJ. The percentage of the seshuu giin (hereditary members of the National Diet or parliament) is especially high in the LDP. Nearly 40% of the LDP's 308 members of the lower house are the sons, daughters or in-laws of politicians. Japan's current political drift has led to a chorus of complaints that politicians seem more intent on jockeying for power than on fixing the country's sluggish economy. The Japanese public is slowly acquiring distaste for family-dominated politics. Increasingly, Japanese political inheritance is seen within the country as undercutting the egalitarian nature of democracy.
Political Scandals
The ruling DPJ government is going through a tough phase as Prime Minister Yukio Hatoyama and DPJ Secretary-General Ozawa are facing allegations of funding scandal during the elections of August 2009. Judicial review panels are set to hand down decisions soon on whether Prime Minister Hatoyama and Ozawa should be indicted over misreporting of their political funds. Both politicians have denied any wrongdoing, but public suspicions, especially over Ozawa's funding, have been a key factor behind the government's tumbling support rates ahead of an upper house election in July 2010 that the ruling Democratic Party must win to smooth policymaking. The Democrats need to win an outright majority in the upper house election to reduce the clout of two small parties whose cooperation is currently needed to enact legislation smoothly. A ruling bloc loss would create a parliamentary deadlock.

PESTLE analysis
Economic analysis
Overview
Japan is the second largest economy in the world after the US. Its GDP per capita is also among the highest in the world. Deregulation in some of the sectors allowed consumer spending to go up, which led to an increase in demand during the 1980s and first half of 1990s. The economy has been experiencing an economic downturn with a real GDP growth rate averaging 0.6% during 200209. However, the global economic crisis has hit the Japanese economy pretty badly, as the country is heavily dependent on exports. In 2008, the economy recorded a negative growth of 0.3, which declined further in 2009 to -5.4%. Besides a negative GDP growth, prices have been falling in the Japanese economy. The economy entered into deflationary phase in 2009, which is expected to continue during 2010. Moreover, capital investment has been adversely affected by credit squeeze and lower profit margins.
Table 4:
Analysis of Japans economy
Current strengths High per capita GDP Well developed manufacturing and financial services
Current challenges Worsening economic indicators Deflation Rising unemployment
Future prospects Growing foreign exchange reserves Current account surplus
Future risks Delayed economic recovery Sustainability of government finances Rising costs of ageing population
Source: Datamonitor
DAT AMONITOR
Current strengths High per capita GDP

In terms of GDP, Japan is behind the US. In real terms, however, Japan is on better ground due to its per capita GDP, a measure that demonstrates a country's level of average living standards. Japan's per capita GDP increased at an annual average rate of 2.1% during 200508, slightly higher than 1.9% of the US and notably better than Germany's 1.4%. However, 2009 has been an exception with a negative per capita growth of 0.1%. In other words, Japan has actually enjoyed the biggest gain in average income among the three rich economies. Among the G7 economies it ranks second, following the UK, in terms of per capita GDP. The high per capita GDP represents a broad-based economic growth, which in turn creates a good economic base for further growth. As of 2009, the country has a per capita GDP of $32,600.

PESTLE analysis
Well developed manufacturing and financial services industry

After the Second World War, Japan moved quickly towards industrialization and emerged as an economic power by setting up large number of technologically advanced industries. Before the economic crisis set in, the country had undisputed leadership position in the electronics and automobile segment. Nevertheless, its manufacturing base and technological knowhow has remained unparalleled. Japan also undertook large scale structural reform measures and privatized the Japan Post, which was Japan's largest financial institution besides being the only national postal delivery system. After years of liberalization, Japan has one of the worlds largest financial sectors. Its financial-asset base stood at around 1,200% of GDP in 2008, compared with around 900% for the US. Although the credit crisis has adversely affected Japanese banks, they are better positioned than most of the banks of the US and Europe because of limited exposure to mortgage-backed securitized debt products. Thus, there are reasons for optimism that once the economic revival begins, Japanese financial services industry will be in a better position to reap the benefits of recovery.
Current challenges Worsening economic indicators

Japan is facing its worst economic challenges since the World War II. The GDP growth stood at around 0.6% over 2002 09. The economic conditions further deteriorated since 2007, when the economy recorded a growth rate of 2.2%. It plunged into a recession in 2008, with a negative growth rate of -0.4%. The recessionary trend deepened in 2009 and Japanese economy contracted by 5.4%. The government finances of Japan are in a bad shape. Japan's parliament has approved a record JPY1 trillion budget for the fiscal year from April 2010, with an all time high of JPY 44.3 trillion in new bond issuance underlining the countrys dire financial situation. The government is not initiating any stimulus package as there is a risk of a double dip recession. Japans export driven economy has taken a beating in recent years because of a dip in demand for the cars, high-tech goods and machinery. Japans exports decreased from around $925 billion in 2008 to less than $808 billion in 2009. These economic challenges do not augur well in terms of economic revival.
Deflation
The CPI inflation rate was negative during 200205. It increased to 0.3% in 2006, but fell to 0.10% in 2007. However, it registered an increase in 2008 to reach 1.75%. The economy is going through a deflationary phase. Japan recorded deflation of 1.7% in 2009 and it is expected the country would remain in deflationary phase for the most of 2010.The deflationary pressure and reduced government stimulus are currently leading to decreased consumption and industrial losses.
Rising unemployment
Unemployment has been a perennial problem in Japan during the past two decades. In 1991, the unemployment rate was around 2.2%. By 2001, the unemployment rate increased to 5%. In 2002 and 2003, unemployment was as high as 5.3%. Japans unemployment rate reached to a seven-year high of 4.8% in March 2009. According to government sources, there was an increase in the jobless population for the fifth straight month. The total number of unemployed population climbed to

PESTLE analysis
3.35 million. Moreover, it was the first time since 2006 that the number of unemployed has exceeded the three-million levels. The year end unemployment for 2009 rose to around 5.1% and it is expected that unemployment rate would further rise to 5.4% by 2010. Large scale unemployment and lower real wages has been detrimental to consumption expenditure.
Future prospects Growing foreign exchange reserves

Japan's foreign exchange reserves stood at $1 trillion in December 2008. Japan is the second country after China with official reserves exceeding $1 trillion. The reserves have reached this level after the Japanese government sold more than Y30 trillion worth of Japanese currency for dollars in foreign exchange interventions through the Bank of Japan (BOJ) between 2003 and 2004. The step was taken to restrict appreciation of the yen against dollar. Although the Bank of Japan has not undertaken such massive operation since then, the reserves have continued to increase on investment income. In March 2009, the Japanese government decided to use these reserves to finance the Japanese firms operating overseas. Furthermore, Japan, with China and South Korea has reached an agreement to contribute to a reserve pool on a 2:2:1 ratio ($38.4 billion from China and Japan each and $19.2 billion from South Korea). The pool will help the member countries to tide over any foreign capital flow shortage. As of March 2010, the country had foreign exchange reserves equaling to $1.04 trillion, making the Japan 2nd highest in the world after China.
Current account surplus

Japan has been posting current account surplus consistently between 200109. The current account surplus increased to more than $200 billion in 2007 and despite recessionary trends in 2008 it still managed to post a surplus of around $150 billion. The countrys current account surplus in February 2010 rose 29.6% from a year earlier to JPY1.471 trillion ($22 billion), underpinned by growing demand for Japanese products overseas. It marks the seventh straight month of year-onyear improvement in the current account balance. Japan has seen a current account surplus for 13 straight months starting February 2009. The increasing current account surplus gives a very strong picture of countrys external trade and the strength of the Japanese economy to come out of the crisis.
Future risks Delayed economic recovery

It is feared that the Japanese economy will continue in a deflationary state in 2010 as prices have been falling steeply since July 2008 with no signs of economic growth. A stronger Yen will further fuel deflationary conditions in the economy. The deteriorating global economic conditions have further worsened Japanese economys prospects. Japanese exports, which contribute nearly 20% to the GDP, will remain subdued; providing little scope for recovery. The decline in Japanese exports started with the US, especially from the automobile sector, but spread to other countries in Europe quickly. Since the latter half of 2008, exports to East Asia has also been declining because of economic slump in these countries. At the same time little investment is forthcoming because of tightening of credit conditions and lower profit margins. Moreover, there are little chances of growth in consumption expenditure as real wages have been falling and unemployment has been on a rise. In this scenario the economic recovery of Japan may be delayed beyond 2011.

PESTLE analysis
Sustainability of government finances

The government spending programs will have large scale future implications for the Japanese economy. It is anticipated that public spending will increase the public debt without proportionate contribution to economic growth. Also, there are reservations about financing such a huge program. This stimulus program, combined with poor economic state will lead to widening of budget deficit from 1.4% of GDP in 2008 to 5.7% of GDP in 2009, before narrowing slightly to 5.4% of GDP in 2010. Since revenue sources are drying up, the government may find it difficult to maintain this level of proposed spending
Rising costs of ageing population

As of 2007, Japans population includes more than 25 million people over the age of 65. This has become a major cause of concern in the country, with the number of citizens drawing a pension becoming correspondingly higher. The cost of tax benefits enjoyed by the retired is also rising fast, while domestic savings are gradually decreasing. The governments expenditure on social security is growing, with most of the expenditure going into pensions, medical care, nursing and welfare. This could have repercussions on the countrys economy, as there will be a proportionately smaller labor force available. The problem of an ageing population will plague Japan in the coming years as people continue to retire. Consequently, there will be a decrease in the working population and productivity. Therefore, the ageing population can dampen economic activity in the future.

PESTLE analysis
Social analysis
Overview
Japan is one of the most highly developed nations in the world, with one of the highest GDPs per capita. However, Japan is beset with the problem of an ageing population, a concern faced by many developed countries. Japans declining fertility rate has compounded the problem. The Japanese government has reacted to this situation very boldly, increasing budget allocation for social welfare and implementing various policies supporting childcare. The country is also building compact cities around more metropolitan towns to reduce congestion. Furthermore, the Japanese government is now making efforts to increase the population through various measures, including child-care incentives and employee benefits for those with children.
Table 5:
Analysis of Japans social system
Current strengths Social welfare initiatives Urbanization
Current challenges Ageing population Decreasing fertility rate Mismanaged social security system
Future prospects Compact cities Government initiatives to increase population
Future risks Declining labor force Comparatively poor education and healthcare performance
Source: Datamonitor
DAT AMONITOR
Current strengths Social welfare initiatives

A major portion of Japans national budget is set aside for social welfare initiatives. Around $192 billion was spent on supporting the country's rapidly ageing population until 2008. This is an increase of 3% from 2007. Of the three main priorities included in the 2008 budget, two focus on the social sector: regional vitalization, and improvement of the social safety net for citizens. The social welfare initiatives for the older population include reduction in medical fees, use of generic drugs, increasing government-managed healthcare centers and several other public schemes. In March 2010, the lower house of parliament in Japan passed a bill that will make tuition free for public high school students and will provide allowances to families raising children. Under the bill, households with children of junior high school age (16) or younger will be entitled to JPY13, 000 ($144) per month to help with child-rearing costs. Private and state high schools will also be paid between JPY120, 000 ($1,330 dollars) and JPY240, 000 yen ($2,660) a year to contribute toward the tuition costs of young people. Youths going to state- run high schools will not have to pay tuition fees under the bill. These measures should provide greater impetus to the social security of the citizens and also increase the standard of living.

PESTLE analysis
Urbanization
Japan is an urban society, with only 5% of the labor force engaged in agriculture. Even these few farmers tend to hold part time jobs in nearby cities and towns. Out of Japan's population of 127 million, almost 80 million live in cities. Tokyo, the capital city, is one of the worlds largest cities, with a population of more than 12 million people. The number of residents in the Japanese capital is greater than the combined population of the next three largest cities: Yokohama, Osaka and Nagoya. With a population of 3.2 million, Yokohama, south of Tokyo, is Japans second largest city. It is also the countrys largest port, a manufacturing and ship building centre. Japans third-largest city, Osaka, is the countrys third most important seaport and home to many leading Japanese manufacturers. Many other cities in Japan are equally specialized and have their own identity. These well developed cities attract not only tourists to the country, but also provide opportunities to the foreign investors.
Current challenges Ageing population

Japan, like many other developed countries, is facing the problem of an ageing population. The proportion of the population aged 65 and above has consistently increased in the country due to various factors. In 1989, around 10% of population was over 65 years old. This increased to around 17% by 2000. In 2009, more than 22% of the population was above 65 years of age, and it is expected that by 2025 this will increase to more than 28%. The burden caused by the ageing population has increased due to factors like decreasing fertility rates, increasing abortions, late marriages, the increasing participation of women in the workforce and small living spaces. Due to improved healthcare facilities, life expectancy also increased in the country. The life expectancy in the country is 82 years, which is one of the highest in the world. Consequently, ageing population has led an increase in national debt and a decrease in savings.
Decreasing fertility rate

The main cause for decrease in the fertility rate of Japan is due to early adoption of population control. The Japanese government followed a policy of the more the better until 1941. From 1948, the new population policy of the government was formulated around the Eugenic Protection Law, which relaxed laws restricting abortions to limit the number of births. Therefore, during 194957, the total fertility rates in country fell from 4.54 per woman to 2.04. During 195773, there was no significant change. Furthermore, during 19732003, the total fertility rate fell from 2.14 per woman to 1.29. Due to very early adoption of population control measures and rapid industrialization in the country, the fertility rates have come down progressively. In 2009, the fertility rates were very low at 1.21children per woman. Lower birth rate would create imbalances in the countrys demographics. If the country grows at the current rate, the population of Japan will decline by more than 25% by 2050. This is leading to a very few people being added to the workforce in the country.
Future prospects Compact cities

Japan is home to one of the most populated cities in the world. Tokyo, the capital city of Japan, is inhabited by more than 10 million people, making the city the most congested in the country. There are many other highly populated cities in the country, which likewise suffer from limited living space and heavy traffic. To reduce the congestion in Japan's cities, the

PESTLE analysis
Japanese government has introduced the concept of compact cities. The government initiated this plan in 2006, and it is now starting to really take shape. The concept revolves around building well-planned infrastructure. The government also succeeded to extend this plan by attaching a concept of Eco-Model Cities, which would promote low carbon society in the city. Around six cities were selected in 2008 and seven more were added in 2009. All these cities prominently feature activities and future plans to achieve drastic reductions in greenhouse gas emissions. These compact cities limit urbanization by focusing on commercial and residential facilities, avoiding dependence on highrise buildings. Compact cities are constructed in such a manner as to reduce the distances between offices and homes, easing the kind of traffic congestion prevalent in larger cities. Moreover, when commercial and public facilities are within walking or cycling distance, access for senior citizens improves. The concentration of urban infrastructure not only encourages consumption but also reduces the costs of maintenance and renewal. In addition, the reduced need for cars results in less exhaust emissions, thereby improving the environment. The cities of Sendai and Aomori are the best examples of compact cities in Japan. All the country's cities are now adopting the concept of compact cities, and completion of these projects, it is presumed, will bring in an all-round improvement in civic efficiency in the nation.
Government initiatives to increase population

The Japanese government is taking several measures to increase the country's population. The government has started several initiatives including Angel Plan, Nursing Care Insurance Law, Child Allowance Law, Childcare Leave Law and Child Welfare Law. Under these projects, the citizens are provided with various incentives to support their family and children. The government also introduced the 40-hour working week for those with children, making it easier for working people to spend time with their families. The Japanese government is planning to lift restrictions on immigration to prevent future demographic crisis and tide over problem of an aging population. For instance, a small beginning has been made by allowing 1,000 Filipino nurses to work in Japan. There are also discussions regarding increasing the number of foreign
students in Japan as it will add to the pool of skilled labor.
Future risks Declining labor force

A study by a research team in the Ministry of Health, Labor and Welfare found that across 10 years, starting in 2006, Japan's labor force will decline by 4.4 million workers if measures are not taken to hire more women and senior citizens. The decline reflects a continuing decrease in the birthrate. The study found that, by 2030, the labor force would decline by about 10.7 million. The labor population is forecast to decline from the 66.57 million of 2006 to 62.17 million in 2017 and to 55.84 million in 2030. In 2006, only 48.5% of women were in work, a decline of 1.5% from a decade earlier. In contrast, 73.2% of men are employed. If proper measures are not taken by the government to enhance the labor force, there will soon be consequences in regards to the overall productivity and output levels of the nations economy.
Comparatively poor healthcare performance

Japans education and healthcare system does not compare favorably with other advanced economies. According to the OECD data on healthcare (How does Japan compare, 2008), Japan ranks below other OECD nations in terms of healthcare spending per capita, with spending of $2,474 in 2005 (adjusted for purchasing power parity), compared with the OECD average of $2,824 in 2006. Furthermore, healthcare spending in Japan rose, in real terms, by 2.5% between 2000

PESTLE analysis
and 2005, a growth rate lower than the OECD average of 5%. The OECD report also mentions that Japan has fewer physicians per capita than most other OECD countries. In 2006, Japan had 2.1 practicing physicians per 1,000 population, well below the OECD average of 3.1.

PESTLE analysis
Technological analysis
Overview
Japan is one of the most technologically advanced countries in the world. The most important asset is its strong knowledge base, which has earned accolades for the country. Japan is also the nation with the third highest R&D expenditure in the world. Japan also has the advantage of having technology giants like Sony, Mitsubishi, and Canon, among several other players, which have a global presence as technologically advanced companies. Japan is also the world leader in robotics. The ageing population and corresponding rise in wage costs are the major problems presently faced by the country in the technology arena. In the coming years, emerging nations like China and India may soon become competitors with their low cost research facilities and wages.
Table 6:
Analysis of Japans technology landscape
Current strengths Strong knowledge base Presence of large global players Leader in robotics
Current challenges High wage costs
Future prospects Increasing patents Eco-friendly technologies Increasing R&D expenditure Advancements in the medical sector
Future risks Growing threat from China and India Declining technical workforce
Source: Datamonitor
DAT AMONITOR
Current strengths Strong knowledge base

Japan is historically known to be a land of innovation. Over the years, the country has developed many cutting edge technologies in advanced fields like robotics. The researchers of Japan are one of the most important assets of the country, as they are responsible for coming up with sophisticated and innovative technology products. Japan is a leading nation in the fields of scientific research, technology, machinery and medical research. It maintains the world's third largest budget for R&D, at $158 billion, and was home to over 677,000 researchers in 2007. The number of personnel involved in R&D as of March 31, 2008 was 1,055,200, an increase of 0.3% over the previous year. Japanese researchers have also repeatedly won Nobel prizes from 1973 to 2002. With increasing budget allocation to R&D, the governments intent to improve the countrys R&D and innovation track-record is quite clear.

PESTLE analysis
Presence of large global players

Japan has developed some of the biggest and best-recognized global brands in the world. Japanese companies of all sizes (from small ventures to major multinationals) produce unique and innovative products and services. Many Japanese companies have established subsidiaries, branches and production bases throughout the world, and are continuing to expand their networks in all areas, from procurement of materials to production and marketing. Many small and mediumsized enterprises (SMEs) of Japan are major suppliers of advanced equipment all over the world. Many Japanese companies also manufacture high precision equipment aided with micro-fabrication techniques. These are vital inputs for many global majors around the world. Some of the SMEs in Japan have expertise in niche technologies and compete with large corporations. Large companies that enjoy a global presence include Sony, Matsushita, Mitsubishi, Toshiba, Hitachi and Canon. Among these Sony and Canon have overseas sales ratios of more than 70%, and the rest of the companies have overseas sales ratios of more than 50%.
Leader in robotics
Japan leads the world in the production and use of robots, possessing more than half (402,200 of 742,500) of the world's industrial robots used for manufacturing. The country also produced QRIO, ASIMO and AIBO. Sony's QRIO is a bipedal humanoid entertainment robot, designed specifically to recognize voices and faces as well as memorize peoples likes and dislikes. ASIMO is a humanoid robot created by Honda. AIBO is a robotic pet designed and manufactured by Sony. It can walk, see its environment through a camera, and recognize spoken commands. AIBO is considered to be an autonomous robot, as it is designed to learn and memorize from its external stimuli and the environment. Japanese companies have tie-ups with various large corporations around the world to develop robotic technologies. Microsoft recently joined forces with Japanese humanoid maker, Tmsuk, to promote its newly launched Microsoft Robotics Studio. There is a growing industrial need around the world for robots, and Japan has the required expertise to be a pioneer and a leader in this area. The country is also integrating robotics in space programs to ensure precision and safety on space missions. Space Oriented Higashiosaka Leading Association (SOHLA), a private space agency, is gearing up to send a robot to the moon by 2015. The $10.5 million robot named "Maido-kun" is being developed in coordination with the Space Exploration Agency of Japan (JAXA).
Current challenges High wage costs

Japan has the highest wage costs in the world in the technological sector, and tops the list with an average annual salary of more than $86,000. Japan is followed by Australia and the US, with average annual salaries of around $80,000 and $75,000 respectively. Compared to some of the other emerging Asian nations like India and China, Japan is becoming a costly place to conduct scientific research. Moreover, the proportion of people in its technical labor force is also coming down due to the ageing population, which is increasing wage costs. This is also reducing the competitive edge of Japanese companies, as products are becoming costlier.

PESTLE analysis
Table 7:
Country India US Japan China
Average annual salaries for researchers across countries

Average Annual Salary ($ 2006) 11,526 75,556 86,503 3,956 47,663 80,572 Average Annual Salary ($ 2006 PPP adjusted) 56,780 78,868 77,861 17,276 50,398 78,302 DAT AMONITOR
EU (average of 25 countries) Australia
Source: Datamonitor
Future prospects Increasing patents

Japan has one of the highest numbers of patents in the world after the US. The country is ahead of scientifically advanced countries like Germany, France and Canada. Statistics show that of all the new patents filed in the world each year, at least 40% belong to Japan. In the year 2008, Japan filed 38,066 patents with USPTO, which is one of the highest in the world. Increasing numbers of patents give a very positive signal about the scientific growth, and also positively influences further research and development.
Eco-friendly technologies
Japan is trying to build innovative technologies for the improvement of the environment, using energy-saving technologies that are ecologically friendly. The Japanese companies are now moving towards eco-friendly technologies, with carbon fiber now taking the place of aluminum in planes and heavy automobiles. Japan is a world leader in the carbon fiber industry, producing and selling about 70% of the product world-over. The most encouraging aspect about carbon fiber is that relatively little CO2 is produced during its production. Kawasaki Heavy Industries (KHI), one of the three Japanese heavy industry firms involved with the production of Boeing's 787 Dreamliner, produces about 10% of the 787's parts. These include the main landing gear wheel well, the main wing fixed trailing edge and part of the forward fuselage. KHI, Mitsubishi Heavy Industries, Ltd. and Fuji Heavy Industries Ltd. will together be producing 35% of the parts for the 787. While conventional aluminum airplanes require a large number of nuts and bolts during assembly, the use of carbon fiber requires fewer such parts as the material can be molded into shape as necessary. The Japanese government is taking measures to encourage the development of energy-saving technology and cutting-edge materials such as carbon fiber to fight against global warming.
Increasing R&D expenditure

Japans R&D expenditure has been consistently rising for the past seven years. Since 2001, the Japanese government has always allocated more than 3% of its GDP towards R&D. In 2007, the funds allotted were more than $155 billion, compared to $125 billion in 2001. It is also expected that the government will continue to keep R&D as one its important priorities, irrespective of other economic policies. In 200708, the R&D expenditure was 3.37% of GDP, compared to 3.34% in 2006 and 3.30% in 2005. The total R&D expenditures for 2007 (April 1, 2007-March 31, 2008) in Japan were JPY18, 943 billion

PESTLE analysis
($164.7 billion). Out of the total R&D expenditure, allocation for natural sciences reached JPY17, 556 billion ($152.7 billion). Increasing R&D expenditure augurs well for the country.
Table 8:
Year 2000 2001 2002 2003 2004 2005 2006 2007
Japans R&D expenditure

Expenditure in $ billion 139 125 122 135 150 151 154 165 Expenditure as % of GDP 2.99 3.07 3.12 3.19 3.27 3.30 3.34 3.67 DAT AMONITOR
Source: Datamonitor
Advancements in the medical sector

Japans medical care system is undergoing significant changes due to the application of advanced information technology. There is a new trend toward the introduction of patient charts in electronic form as a means of increasing the quality of medical care while also improving efficiency. The Japan Hospital Association, conducting a survey of member hospitals (including national government hospitals) on the use of electronic medical care information systems, found that a mere 1.1% of 761 member facilities (729 of which general hospitals) had adopted e-chart systems. Around 3.3% had such systems in the development stage and 25.9% were considering the possibility of adopting the system. This means that around 30% of medical facilities were either using electronic charts, or were seriously considering adopting them. When combined with the 31.1% the hospitals that use order systems, which are used to convey information between doctors and medical staff that are either in use or in development or planning stages, information system usage amounts to 63.9%. These kind of medical information systems bring in the right information at the right time, and keep medical staff better informed. This will soon bring in greater efficiency in Japan's medical care systems.
Future risks Growing threat from China and India

With China and India fast developing into R&D outsourcing centers, Japan has strong competition for R&D in the future. Factors working to the advantage of both China and India include low costs and the availability of a highly skilled labor force. China is also welcoming foreign investors with special economic zones (SEZs) to support research and development. To compete against these nations, the Japanese government has to come up with innovative policies to create an attractive R&D climate.

PESTLE analysis
Declining technical workforce

Though Japan, to its credit, has many scientific achievements, the number of people passing out from technical institutions is slowly declining. Until 2005, the number of R&D personnel in Japan was consistently increasing every year. In 2007, the number fell to around 880,000 from more than 900,000 in 2005. In 2007, it has been estimated that the number of R&D personnel has declined by 1% year-on-year (YoY), and it is expected to fall by 1.3% in 2009. This is largely due to the declining population and an increase in people retiring from their vocations. If more students are not encouraged to take up technical courses, there will soon be a crisis in Japan due to lack of scientific personnel.
Table 9:
Years 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
R&D personnel in Japan, 200212

Number of people employed in R&D ('000) 826.0 880.5 900.4 907.6 897.9 888.8 880.2 868.7 857.7 852.5 847.6 6.60 2.26 0.80 -1.06 -1.01 -0.97 -1.31 -1.26 -0.60 -0.58 DAT AMONITOR Growth rate (%)
Source: Datamonitor

PESTLE analysis
Legal analysis
Overview
Japanese law was previously based on ancient Chinese law, but later adopted a system similar to that of Germany and the US in the beginning of the 20th century. This turned out to be advantageous for Japan, as it made its legal system compatible to that of the Western world. The knowledge of western law has also brought a growing legal services market into Japan, a market which had a revenue base of $4.1 billion in 2008. The judicial system of Japan is criticized for its leniency towards the political classes. The system is also plagued with human rights violations, especially of prisoners.
Table 10:
Analysis of Japans legal landscape
Current strengths Legal system similar to the US and Germany Strong legal service market Future prospects Tax relief for foreign firms
Current challenges Slow legal procedures Weak prosecution system
Future risks Declining judicial reviews Violation of human rights
Source: Datamonitor
DAT AMONITOR
Current strengths Legal system similar to the US and Germany

The Japanese legal system is similar to the legal system of Germany and the US. The constitution of Japan was influenced by Chinese law, but since the late 19th century it was influenced by the civil law of Germany. Following US occupation in the 40s and 50s, the country also adopted certain American laws. Japan's judicial law thus is compatible with that of the US, as well as being similar to the legal systems of European countries; as such, the Japanese legal system is not alien to investors from these parts of the world. A familiar judicial system makes it easier for foreign investors to operate in Japan, and to be aware of acceptable behaviours in the country. Furthermore, with the US and Germany being among Japan's top technology partners, their business operations in Japan have become very similar to those in their own countries.
Strong legal service market

With all-round expertise in the US and European law, Japan is becoming a centre for legal services. The Japanese legal services market generated total revenues of $4.1 billion in 2008, representing a compound annual rate of change (CARC) of -6.3% for the period spanning 2004-2008. In comparison, the Chinese and Indian markets grew with compound annual growth rates (CAGR) of 13.5% and 11.3% respectively, over the same period, to reach respective values of $22.2 billion and $8.3 billion in 2008. Market consumption volumes increased with a CAGR of 4.8% during 200408, to reach a total of 26.4 thousand legal professionals in 2008. The market's volume is expected to rise to 31.3 thousand legal professionals by

PESTLE analysis
the end of 2013, representing a CAGR of 3.5% for the 200813 period. The legal services market includes practitioners of law operating in every sector of the legal spectrum. These include commercial, criminal, legal aid, insolvency, labour/industrial, family and taxation law. This is a growing area in the services market, providing good job opportunities to people who are pursuing legal education.
Current challenges Slow legal procedures

Japans legal procedures are extremely complicated and rigid. Although the courts do not discriminate against foreign investors in particular, they are observed to be incompatible for proceedings of investment and business disputes. Furthermore, Japanese courts are also slow and there are almost no procedures to compel disclosure of evidence from an opposing party. The courts also lack disapproval powers to compel a witness to testify or a party to comply with an injunction. Moreover, the lack of sufficient numbers of judges to deal with heavy caseloads is leading to trials becoming very prolonged. According to the Doing Business Indicators 2010 of the World Bank, Japan is ranked 91st out of 183 countries on Starting a Business indictor. It takes 23 days and eight procedures to start a business compared to OECD average of 13 days and 5.7 procedures. The slow legal procedures are taking a toll on foreign investments in Japan.
Weak prosecution system

Japan has a unique prosecution system in the developed world. Of criminal defendants convicted in Japan, 99% are convicted following their own confession. Prosecutors in Japan bring charges only when they have a signed declaration of guilt from the accused, and such confessions often occur after long hours of interrogation by police. Although defendants have a right to counsel, they are not able to use that right between their arrest and indictment. Moreover, this loophole is utilized by many alleged criminals who refuse to confess and are thus never indicted. Furthermore, during January February 2010, a citizen panel's move to force prosecutors to reconsider a decision not to indict ruling party leader Ichiro Ozawa casts a spotlight on this unusual aspect of Japan's legal system. Ozawa, the general secretary of the party, has been allegedly charged for illegal financial transactions during the 2009 elections. The system has also been criticised for being too lenient.
Future prospects Tax relief for foreign firms

The Japanese Ministry of Economy, Trade and Industry drew up a package of measures to attract more foreign firms. In April 2010, the ministry came up with consensus to provide tax relief to the foreign firms in the country. The package includes tax relief to foreign firms that set up research facilities or Asian headquarters in Japan. The ministry's move came amidst a concern that the US and other European firms are shifting their Asian bases from Japan to other Asian countries, such as Singapore and South Korea. The package also includes speeding up immigration procedures, improving logistics and infrastructure, and developing human resources with advanced language skills. The government hopes that the measures will help foreign firms invest in Japan and create jobs in the country.

PESTLE analysis
Future risks Declining judicial reviews

The Supreme Court is the only Japanese court with the explicit power to review the constitutionality of laws, although it has held that lower courts also have power to interpret the constitution. The Supreme Court exercises judicial review in cases where there is a genuine dispute between parties, and does not accept questions of constitutionality from government officials. However, the Supreme Court of Japan is presently very reluctant to exercise the powers of judicial review given by the constitution, due to its unwillingness to become involved in politically sensitive issues. This has been demonstrated by its non-participation in disputes concerning defence forces and in the sponsorship of Shinto ceremonies by public authorities. The Supreme Courts reluctance to use the provision of judicial review damages its credibility.
Violation of human rights

In Japan, occurrences of human rights violations are mainly due to the faulty criminal justice system, which has been criticized on several grounds. The Japanese police have the right to detain suspects for a long period. Although torture is rarely reported, it has been used as a means to extract confessions under pressure. People are detained and interrogated by police for long periods, though interrogation often induces confession which is later corroborated. Furthermore, there have been problems relating to the social and legal handling of minorities. Although the Japanese society is considered to be homogeneous, minorities do exist, and they often suffer prejudice. The largest local minorities are the two to four million hisabetsu buraku (communities suffering discrimination), descendants of the outcast communities of Japan. People of Korean or Chinese ancestry, along with other foreign residents, face differing degrees of discrimination. The Japanese government needs to bring out measures to alleviate the problems of torture and discrimination against minorities. As it is, continued police harassment not only reduces the credibility of Japan's judicial system, but will also damage international relations with Korea and China in the future.

PESTLE analysis
Environmental analysis
Overview
Japan has strong environmental policies in place. The country has raised its environmental protection standards by increase corporate accountability regarding the environment. Many standards like environmental accounting and reporting have been introduced to tighten the emission levels in the country. The country is also taking serious measures to control the ozone layer depletion. The Japanese government has put various control measures in place and, as a result, the overall environmental quality standards (EQS) of the country have improved. However, issues like persisting air pollution and the heat island phenomenon still plague the country. There is also evidence that suggests Japan's pollution problems are exacerbated by the rise in pollution in China.
Table 11:
Analysis of Japans environmental landscape
Current strengths Strong environmental policies Ozone layer protection law Improved water quality Future prospects Emerging technologies for reduction of CO2 emissions Low-pollution diesel vehicles
Current challenges Air pollution Heat island phenomenon
Future risks Chinas pollution levels affecting Japan
Source: Datamonitor
DAT AMONITOR
Current strengths Strong environmental policies

After going through a period of rapid industrialization during the 70s and 80s, Japan realized the importance of having a sustainable method of utilizing natural resources and protecting the environment. From the late 80s, the country has been on an ecologically-sustainable mode of development. Japan is the only Asian country that has managed to keep its pollution levels down to the acceptable standards of the international pollution control regulations. It has adopted strict measures to counter the problems of waste disposal and energy conservation, which have improved environmental protection in the country. The government has adopted policies to promote environmental awareness among the business houses. Under this, the government has enforced standards such as environmental reporting, environmental accounting, environmental labels, environmental management systems, lifecycle assessment systems and environmental performance ratings. All these standards act as effective control measures in reducing pollution levels in Japan.

PESTLE analysis
Ozone layer protection law

There is a growing concern that depletion of the ozone layer will increase the amount of harmful ultraviolet radiation reaching the earth, leading to health hazards such as skin cancer and cataracts, as well as hindered growth of plants and plankton. The ozone layer has been depleted over the whole globe, except for in tropical areas. The ozone layer over Japan has also decreased, especially in the 80s, but has since remained constant or even improved slightly since the 90s. As of 2005, the size of the ozone hole over Antarctica was average when compared to the previous 10 years. In order to prevent the depletion of the ozone layer, the production of ozone-depleting substances in Japan is now regulated in accordance with the ozone layer protection law. Furthermore, recovering and destroying fluorocarbons at the disposal stage of products are mandated by the home appliance recycling law, the fluorocarbons recovery and destruction law, and the end-of-life vehicle recycling law. With these laws in place, Japanese industries are regulated to reduce the emissions of chemicals that damage the ozone layer.
Improved water quality

Japan has effective processes as regards water quality management systems due to the establishment of Environmental Quality Standards (EQS). According to the results for 2004, Japan's achievement level of EQS for the protection of human health from substances like cadmium was 99.3%, the highest rate achieved by the country. This was an encouraging factor for the authorities, who are making efforts to maintain these levels consistently. Standards set for shielding the living environment were accomplished at slightly lower rates. The Biological Oxygen Demand (BOD) level is one such standard set for measuring the organic contamination in water. In Japan, its EQS achievement level remained at 85.2%. By water area, the achievement levels were 89.8% for rivers, 50.9% for lakes and reservoirs, and 75.5% for sea areas. In particular, the levels for enclosed water areas such as lakes, reservoirs, inner bays, and inland seas were low. In terms of BOD, the achievement rates were 63.2% for Tokyo Bay, 50% for Ise Bay, and 67.3% for the Seto inland sea. The establishment of EQS to control pollution will, hopefully, pave the way towards cleaner water levels.
Current challenges Air pollution

Large scale industrialization has led to deterioration in the environmental quality of Japan. In 2008, a total of 28 out of Japan's 47 prefectures have issued photochemical smog warnings. Such a warning is issued when the density of photochemical oxidants, tops 120 parts per billion per hour. Increase in density will affect both plant and human life. Since plants are even more sensitive to ozone than humans, if the density continues to increase, wheat and soybean production will largely decline, affecting the food supply.
Heat island phenomenon

The term "heat island phenomenon" refers to the fact that urban areas experience higher temperatures than surrounding suburban areas. This phenomenon results in an increase in the number of humid nights in the summer, which leads to more people using the air conditioners. This creates a vicious cycle as the usage of air conditioners increases the amount of heat produced, which again contributes to an increase in the temperature. The other factor contributing to the heat island

PESTLE analysis
phenomenon is the increasing number of high-rise buildings and the highways. The sunlight in daytime increases the temperature of the highways and buildings to as high as 60 degrees centigrade or more. After sunset, the same highways and buildings become the sources of heat contributing to the increase in temperature of the cities. This is becoming a common problem in the major cities of Japan, which are in turn affecting many nearby towns.
Future prospects Emerging technologies for reduction of CO2 emissions

Japan is undertaking initiatives to develop environmentally-friendly technologies to reduce CO2 emissions. In March 2008, the Japanese government came up with a roadmap for the development and introduction of 21 technologies to help reduce global greenhouse gas emissions. One of the projects, The Cool Earth Innovative Technology Plan, calls for the development of a solar power generation system at least four times more efficient than existing systems. It also seeks to develop electric vehicles which can drive at least 500 kilometers with a single charge from home power outlet. The plan calls for both of these targets to be achieved by 2030. Other technological breakthroughs envisaged under the program include a 50% efficiency improvement for coal thermal power generation, and the reduction of the cost of collecting carbon dioxide emitted from thermal power plants and manufacturing factories from $42 per ton to $20 per ton by 2020. These developments will ensure sustainable development and reduce the emissions of greenhouse gases.
Low-pollution diesel vehicles

Diesel-powered vehicles are very popular in the European market, accounting for 50% of new car sales, because of the relatively lower cost of the fuel they burn. They boast around 30% higher fuel economy than gasoline engines and emit less carbon dioxide, two advantages that have caught consumers' attention and prompted even Japanese automakers to introduce diesel automobiles. At the International Motor Show held in Frankfurt in February 2008, Europe's major automakers introduced low-pollution diesel technology using "blue" labels (indicating low-pollution diesel engines) to bolster their environmental image, including Volkswagen's Blue Motion and Daimler's Bluetec. By increasing combustion efficiency, these systems significantly reduce emissions of nitrogen oxide and particulates. With the introduction of low-pollution diesel vehicles, the emissions of exhaust gases in Europe have reduced. In response, Japanese companies have themselves begun making moves to manufacture low-pollution diesel engines. In April 2010, Mitsubishi Fuso, a Japanese truck maker, has released a large diesel engine with low gas emissions to help fight pollution. The company invested $1.5 billion for developing the new engine and it is primarily created for all new models of heavy-duty commercial big trucks and dump trucks with large engines produced by Mitsubishi Fuso. The other automobile giants will follow suit, which will result in reduced levels of vehicular emissions in the future.
Future risks Chinas pollution levels affecting Japan

Chinas rapid economic growth driven by heavy industrialization is increasing pollution that is spreading east towards Japan. A total of 28 out of Japan's 47 prefectures (provinces) have issued photochemical smog warnings since the start of 2007, the largest number ever reported in Japan. Warnings were issued in Oita prefecture, on the southwestern main island of Kyushu and Niigata prefecture, on the main island of Honshu. The warning is issued when the density of photochemical oxidants, which cause photochemical smog and include ozone, tops 120 parts per billion per hour. Despite

PESTLE analysis
worsening pollution, Japan is yet to finalize regulations on the emission of nitrogen oxides and volatile organic compounds, whose reactions create photochemical oxidants. Researchers point to China as the cause of the problem and feel that the rise of photochemical oxidants is due to pollution in China. China's nitrogen dioxide emissions have multiplied 3.8 times in the last 25 years, and if such emissions continue to increase, the annual average ozone density in Japan will reach the environmental standard of 60 parts per billion in 2020. China is expected to grow at a brisk pace for the next two decades, so considerable amounts of Chinese pollution can be expected to affect Japan in the future.

Political landscape
POLITICAL LANDSCAPE Summary

Japan was founded in 660 BC. The countrys first constitution was established in the 7th century by Prince Shotoku. Shotoku was a Shogun, a ruler of the Japanese court when it was based on the Chinese model of governance. In 1889, Emperor Meiji introduced a new constitution, popularly known as the Meiji constitution, which abolished feudalism and established a modern military. The leaders under the emperor also established the directly elected House of Representatives. Meiji was in power until 1912. The Meiji constitution formed the basis of the constitution that is in place in Japan today. In the aftermath of the US invasion of Japan during World War II, General Douglas MacArthur forced the government to replace the Meiji constitution, and the new constitution came into effect on May 3, 1947. The new constitution reduced the emperors role to that of a titular head and cancelled his right to use military force. The major political party in the early fifties that came into the forefront was the Liberal Democratic Party (LDP) and was in power in Japan until it was ousted by a vote of no-confidence in the lower house in 1993. The LDP came to power again in the 1996 elections in coalition with the New Party Sakigake and the Social Democratic Party (SDP). The current prime minister is Yukio Hatoyama, who assumed office after the departure of Tara Aso. The ruling LDP suffered a defeat in the July 2007 elections and lost control of the House of Councillors, which is the upper house of the Diet. Therefore, Japans House of Representatives is controlled by the LDP, while the upper house is controlled by the DPJ. Consequently, this has lead to an impasse as bills are not being passed in the upper house. Moreover, the DPJ is deliberately obstructing the bills, which has led to important legislation being stalled. Economic recession has brought down the prime ministers approval rating, which is at an all time low. The September 2009 general elections became one of the historic events after DPJ won the elections with thumping victory over LDP.
Evolution
Pre 1945
Japan is believed to have been founded by Emperor Jimmu in 660 BC, but the earliest records of a government or a reign of some sort is dated back to 250 AD, or Yamato period, when the Japanese imperial court ruled from the Yamato province. However, between 710 and 1867, the members of the Yamato dynasty were reduced to nominal rulers and the actual power came to rest with the Japanese court rulers called the Shoguns. In the 7th century, under the rule of Prince Shotoku, a new constitution based on the Chinese model was created. The contact with the western world gradually changed the attitude of Japanese towards the Chinese influence and the shogunate. The Yamato period lasted till 1867, when the Tokugawa shogunate conceded power to Emperor Meiji. This heralded the onset of the Meiji era, in which Japan made tremendous development in the areas of politics, the economy, the military, education, industry and society. The Meiji restoration, in essence a political and social revolution that restored the imperial rule in Japan, took place in 1868 AD. The restoration fueled the modernization drive by initiating many reformssuch as abolition of the feudal system, adoption of western legal system and assumption of constitutional governmentthat have transformed Japan from a feudal state to a modern nation. Eventually, in the year 1889, the Meiji constitution was established, forming the basis for the current constitutional framework. This constitution was rooted in the traditional nationalistic outlook of the contemporary Japanese, and was influenced by German legal and political concepts.

Political landscape
The figures below give a snapshot of Japans political evolution since independence. Figure 2: Japan key political events since independence
Source: Datamonitor
DAT AMONITOR
194593
Japan was occupied by the allies during 194552 under the leadership of General Douglas MacArthur, who encouraged the establishment of a new constitution. General MacArthur brought about political and economic liberalization without imposing US ideologies on the country. There was, however, a conflict between the MacArthur camp and the Japanese camp on the contents of the new constitution. He encouraged the Japanese officials to formulate their own democratic reforms. Finally, on November 3, 1946, the new draft was approved by the Privy Council, the House of Peers, and the House of Representatives, and came into effect on May 3, 1947. The new constitution was essentially founded on the British model of parliament. In September 1951, a peace accord was signed with Japan in San Francisco, in the presence of 51 nations. The Japan-US Mutual Security Assistance Pact was signed that assured the security of Japan. In the 1960s, the LDP brought in a robust policy-making process and parliamentary reforms. It went on to rule for the next four decades. However, the 1993 elections, held against a backdrop of bribery and corruption scandals and economic decline, culminated in the LDP being thrown out of power. A seven party coalition took over from the LDP.

Political landscape
19932009
The Japan New Party had broken off from its parent party, the LDP, and won in collaboration with other parties like the Shinseito (Japan Renewal) party, the Sakigake (Harbinger) party, the Komeito party and three other socialist parties. The primary goal of the coalition was to pass effective political reform which the LDP failed to carry out. The LDP, however, bounced back to power in the general election of October 1996, led by the incumbent Prime Minister Hashimoto Ryutaro in coalition with the New Party Sakigake and the SDP. The LDP has been in power since then, maintaining its majority during the 2000 general election. The LDP won the 2003 election with incumbent Prime Minister Junichiro Koizumi at the helm, but by a reduced majority. The 2005 general election was held two years before schedule, as Koizumi called the election after his bill to privatize the Japan Post failed. The most recent election was held on July 29, 2007, won again by Prime Minister Shinzo Abe of the LDP. Shinzo Abe stepped down from the prime ministers position on September 12, 2007 due to political pressure and health problems. He was succeeded by Yasuo Fukuda, who resigned suddenly on September 1, 2008. He was succeeded by Tara Aso on September 24, 2008 as the prime minister of the country. In July 2009, former Prime Minister Taro Aso called for an election in August 2009 following his party's defeat in local elections held in Tokyo. Subsequently, opposition Democratic Party of Japan (DPJ) won general elections by a landslide, ending more than 50 years of rule by the LDP. DPJs leader Yukio Hatoyama was elected as prime minister.

Political landscape
Structure and policies

Key political figures
Key political figures in Japan are: Figure 3: Chief of state: Emperor Akihito Prime minister: Yukio Hatoyama Japan key political figures
Source: Datamonitor
DAT AMONITOR
Structure of government
Japan is a bicameral parliamentary democracy with a constitutional monarchy. The emperor of Japan is the country's monarch and the head of state. He is the head of the Japanese imperial family. The constitution provides for the separation of powers into the executive, legislative, and judicial branches of the government.
Center/ federal
The legislative branch of the government is the bicameral Japanese parliament called the Diet (kokkai). Under the constitution, the Diet is the most powerful branch. It consists of two houses; the House of Representatives (shuugi-in) (480 members) and the House of Councilors (sangi-in) (242 members). The executive branch contains the head of government and reports to the Diet. The prime minister of Japan is the head of the Japanese government and is also referred as the prime minister of the cabinet. The chief of the executive branch, the prime minister, is ceremonially appointed by the emperor as directed by the Diet. He must be a civilian, and a member of either house of the Diet.

Political landscape
Figure 4:
Japan structure of government
Japanese Parliament
National Diet
House of Councilors
House of Representatives
242 members Members elected for six year term 146 members in multiconstituencies and 96 by proportional representation
480 members Members elected for four year term 300 members in single-seat constituencies and 180 by proportional representation
Source: Datamonitor
DAT AMONITOR
State/ provincial
The local governments in Japan are divided into various levels, such as prefectures, sub-prefectures and municipal levels. Japan is divided into 47 administrative divisions. Each of the 47 local jurisdictions has a governor and a unicameral assembly, both elected every four years. Cities are self governing units administered independently of the larger jurisdiction within which they are located. The cities are headed by a mayor elected for four years. The towns of Japan are known as wards, and again have separate mayors. Villages also have a similar governing set up of mayors and councils.
Structure of legislature Key political parties

Liberal Democratic Party (LDP)
The LDP is Japan's largest political party and is a senior partner in the current coalition. Former Prime Minister Tara Aso is a member of the LDP. It is a conservative party and is made up of various conservative and reformist factions. The party regards the protection of liberty, human rights, democracy, and the parliamentary system as its fundamental mission. The LDP has been in power almost continuously since 1955 and has an image of being very traditional on social and foreign issues. However, in the recently held elections for the House of Representatives in August 2009, the party won only 119 out of 480 seats.

Political landscape
Democratic Party of Japan (DPJ)
The Democratic Party of Japan (DPJ) was formed in 1998, after many likeminded opposition parties merged into one. The DPJs focus is primarily on bringing large scale social reforms in Japan. The party was also instrumental in introducing the manifesto (party platform) to Japanese politics, marking the commencement of genuine policy debate. Specific policy proposals include increasing consumption tax to fund the overburdened pension system and moving from a system of tied subsidies to one providing independent budgets. The party won a landslide victory in the recently held elections for House of Representatives. The party achieved the single largest majority winning 308 out of the total 480 seats. New Komeito
The Shin Komeito Party (Japanese name for the New Komeito) is Japan's third largest party and the governing party's junior partner. It was formerly known as the Clean Government Political Assembly and the Komeito. The party is supported by Buddhist organizations like the Soka Gakkai. It is currently a part of the coalition government of the LDP. Japanese Communist Party (JCP)
The Japanese Communist Party is countrys fourth largest party and is an important member of the opposition coalition. The partys avowed policies include severing Japans ties with the US, as well as socialism and peace. Social Democratic Party (Japan) (SDP)
The Social Democratic Party was originally formed in November 1945 through the merger of various prewar proletarian parties. Later it split into the Rightist Socialist Party of Japan, (moderate and social-democratic, 194855) and Leftist Socialist Party of Japan, (extreme socialist, 194855). In 1955, both the groups came back to form the Socialist party of Japan. The party has always been part of coalition governments, never in power as an individual party. It won only six seats in the 2003 general election, compared to 18 in 2000. The party was not successful even in the 2004 upper house election, winning only two seats. In the August 2009 elections for House of Representatives, the party won only seven seats.
Composition of legislature
The election for the House of Councilors was last held in Japan in July 2007. The DPJ won 109 seats against its rival the LDP, which won 83 seats. However, the LDP is still the ruling party, as it has a majority in the lower house, the House of Representatives. The last election for the House of Representatives was held in August 2009: out of a total 480 seats, 308 were won by the DPJ and 119 by the LDP, with the rest shared between other parties.

Political landscape
Figure 5:
Japan current composition of the lower house of parliament
Social Democratic Party-7 Japanese Communist Party -9 New Komeito-21 Others-16
Liberal Democratic Party-119
Democratic Party of Japan-308
Source: Datamonitor
D AT AM O N IT O R
Key policies
The new DPJ led administration has formed the Government Revitalization Unit, which is slated to look into major independent administrative institutions such as the Japan International Cooperation Agency that coordinate the nation's official development assistance. This has been mainly initiated to know the amount of wasteful expenditure in the name of different developmental projects.
Economic
The Japanese government has determined that the best way to bring about an effective economic recovery is by institutionalizing aggressive and competitive structural reforms. The structural reforms implemented thus far, such as the steady progress in disposal of non-performing loans (NPLs), the broad range of efforts for regulatory reform, reorganization and revitalization of corporations, promotion of expenditure and tax reform have been successful in steering the path of the economy towards growth and prosperity. The government plans to focus on issues such as NPLs, deflation and the sagging industry sector to improve its growth. To fight the bad debts and to dispose of NPLs, the Japanese government plans to implement a policy called the Financial Revitalization Program, which will be a periodic activity reinforcing the functioning of small and medium-sized financial institutions. Furthermore, in April 2010 Japan's administrative reform panel (formed by the new government) decided to scrutinize the necessity and the effectiveness of 151 projects (approved by the

Political landscape
previous government) in a bid to trim wasteful budget spending. This is the second-round of the budget screening process by the DPJ-led administration. The government plans to spend only around JPY3.5 trillion on such bodies in the fiscal year starting April 2010; however, cutting costs is not enough to compensate for bloated public spending due to an aging population and higher debt servicing expenses.
Social
In the social front, Japan has primarily had to fight two problems: the ageing population and immigration. In 1989, Japan came up with a 10-year plan that not only supported the elderly by building a national infrastructure, but also reduced costs. The Golden Plan, as it was known, proposed a shift from long-term institutionalized care in hospitals and nursing homes to home programs and community-based rehabilitation facilities. In 1997, following the success of the Golden Plan, Japan formulated a new plan to make long-term care services universally available to older people, which came into effect in the year 2000. To discourage the flow of immigrants, the Japanese government had made amendments to its Immigration Control Act in 1990 to restrict easy entry of migrants from other Asian countries by barring illegal workers and fining hirers, employers or brokers found to be employing people with no working visa or work permit. This law was relaxed in the year 2000 to make Japanese policy more open to immigrants. In the recent parliamentary deliberations on social policy, Prime Minister Yukio Hatoyama has pledged to transfer funds by offering families $140 a month per child and free tuition at public schools starting April 2010.
Foreign
Japan's foreign policies are mostly neutral, so it maintains diplomatic relations with most of the nations in the world. Japan participates in peace-keeping operations despite having reserved views on open military assistance. Although its close relations with the US is considered the foundation of its formation of various foreign policies, Japan has good ties with other countries which it tries to maintain via economic assistance and regular diplomatic visits. Japan has also taken an active part in fighting against global warming and greenhouse gas emissions. The main objectives of Japans foreign policy are: to maintain the US-Japanese security alliance; to foster and work for international peace and security; to aggressively fight against terrorism.
Japan is an active participant along with the US and South Korea in formulating the policy towards North Korea. It also participates in regular talks on ending North Korea's nuclear ambitions. In 2007, Japan refused to provide assistance to North Korea, until the abduction issue is successfully resolved. It is alleged by the Japanese government that around 17 Japanese citizens were abducted by the North Korean government agents from 197783. Later on in August 2008, following North Koreas promise to reinvestigate those cases, Japan entered into an agreement with North Korea. However, North Korea has failed to implement the agreement.

Political landscape
Japan is also working towards improving its ties with South Korea. Although economic and cultural tie has improved between the two countries, political differences continue to be there including territorial disputes involving the Liancourt Rocks, In another significant development, in 2009 Japan came closer to Russia as the two nuclear powers decided to expand their cooperation in the nuclear industry. Such an agreement will open the doors for joint uranium mining, nuclear reactor construction and treatment of spent nuclear fuel for a period of at least 25 years. Russia has also expressed its willingness to resolve its territorial disputes with Japan.
Defense
Japan has been maintaining a passive defence policy since the end of World War II. After the two Gulf wars and due to various terrorist activities, Japan has now become a more active and assertive power. Japan's only security treaty, the 1960 Treaty of Mutual Co-operation and Security with the US, gives Japan unilateral responsibility for its internal security, with the US agreeing to defend Japan if it was attacked. Japan is host to nearly 50,000 US military personnel under the terms of the treaty. According to a bilateral agreement of 2006, the forces are to be reduced to a large extent. There are about 200 Japanese air force personnel in Kuwait to help transport supplies to the US-led coalition in Iraq. Japan's allocation for defence expenditure for 2009 was $50.23 billion, the fourth largest provision in the world after the US, China and Russia.
Performance
Governance indicators
The World Bank report on governance uses 'voice and accountability', 'political stability and absence of violence', 'government effectiveness', 'regulatory quality', 'rule of law', and 'control of corruption' as indicators for 212 countries and territories over the period 19962008. The study was carried out by Daniel Kaufmann, World Bank Institute; Aart Kraay, World Bank Development Economics Research Group; and Massimo Mastruzzi, World Bank Institute. For any country, a percentile rank of 0 corresponds to the lowest or most negative rating and 100 corresponds to the highest rank. Under this section Japan would be compared with other neighbouring Asia-Pacific countries like China, South Korea and Australia. As per the study, Japan was ranked in 76.0 percentile on the voice and accountability parameter in 2008. Voice and accountability measures the extent to which a country's citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association, and freedom of the media. Japan ranks high due to deep rooted democratic principles and respect for freedom of expression and the media. Japan is ranked highest in the Asia-Pacific region, but is still behind Australia which is ranked in the higher percentile. Japan was ranked in 79.4 percentile on political stability and absence of violence in 2008. Political stability and absence of violence measures perceptions of the likelihood that the government will be destabilized or overthrown by unconstitutional or violent means, including domestic violence and terrorism. In comparison to other nations like South Korea and China, Japan has a higher percentile on account of amiable international relations. It however, ranks lower than Australia, having a lower percentile rank of 85.2.

Political landscape
Japan received 89.1 percentile on government effectiveness in 2008, which was an increase compared to its rank in 2004 (84.8 percentile). Government effectiveness measures the quality of public services, the quality of the civil services and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government's commitment to such policies. Japans rank is on a high level due to successive governments from different political parties having broadly pursued similar economic policies, leading to stability in policy formulation and implementation. Under this indicator, Japan scores lower than Australia, having a high percentile rank of 96.7. In 2008, Japans performance in terms of regulatory quality was rated at 86.5 percentile. Regulatory quality measures the ability of the government to formulate and implement policies and regulations that permit and promote private sector development. High ranking indicates effective implementation of policies and regulations for the private sector. Even in this indicator, Australia was rated higher than Japan at 97.6 percentile. Japan scored 89.5 percentile on rule of law in 2008. Rule of law measures the extent to which agents have confidence in and abide by the rules of society; in particular the quality of contract enforcement, the police, and the courts, as well as the likelihood of crime and violence. In comparison, Australia is ranked at 95.2 percentile. Japan ranks 85.5 percentile on control of corruption in 2008. Control of corruption measures the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as "capture" of the state for private interests. Comparatively Japan has a lower ranking than other developed nations. Australia has a higher percentile rank of 96.1 on this parameter.
Outlook
The DPJ, the major opposition political party was, victorious in the 2007 upper house election. The DPJ, therefore, became the largest party in the 242-seat House of Councilors with 109 seats, which is the first victory for an opposition party since 1955. Subsequently, in the recently held House of representative elections in August 2009, DPJ went on to win a landslide victory and is currently leading the country with economic challenges to be solved. In April 2010 Japan's administrative reform panel (formed by the new government) made recommendations to scrutinize the necessity and the effectiveness of 151 projects (approved by the previous government) in a bid to trim wasteful budget spending. This is the second-round of the budget screening process by the DPJ-led administration. The government plans to spend only around JPY3.5 trillion on the projects in the fiscal year starting April 2010; however, cutting costs is not likely enough to compensate for bloated public spending due to an aging population and higher debt servicing expenses. On the political front, Prime Minister Hatoyama is in an increasingly challenging situation over a dispute with the US involving plans to relocate a US Marine base to a less crowded part of Okinawa, as he approaches a self-imposed deadline at the end of May 2010. The dispute has frayed ties with the US and fanned doubts among voters about Hatoyama's leadership skills. Furthermore, the DPJ needs to win an outright majority in the mid year upper house election (July 2010) to reduce the clout of two small parties whose cooperation is currently needed to enact legislation smoothly. A ruling bloc loss would create a parliamentary deadlock. Prime Minister Hatoyama is facing allegations of malpractices in election funding, which could tilt the popular support in the elections. Furthermore, DPJs Secretary-General Ozawa is also facing allegations of malpractices in electoral funding. The elections to the upper house remain crucial for the DPJ and the impact of the funding scandal remains uncertain.

Economic landscape
ECONOMIC LANDSCAPE Summary

Japan recorded an average economic growth of 10% over the years 195060. The country displayed an impressive growth pattern after World War II until the oil crisis in 1973. The oil crisis brought down the GDP growth rate to a modest 4% supported only by the industrial sector. In 1980, Japan entered a phase of high economic growth and high inflation known as the bubble economy. The bubble burst in the early 1990s and Japans economy plummeted, with low real growth of 1%, low prices and bad debts. Thereafter, Japan adopted much-needed monetary and fiscal reforms to bring stability to its economy. The economy has been experiencing an economic downturn with a real GDP growth rate averaging 1.8% during 200207. However, the global economic crisis worsened things for the Japanese economy, which is heavily dependent on exports. In 2008, the economy recorded a negative growth of 0.4%, which declined further in 2009 to -5.4%. Besides a negative GDP growth, prices have been falling in the Japanese economy. This has led the economy into a deflationary phase in 2009, with a deflation of 1.7%. Moreover, capital investment has been adversely affected by credit squeeze and lower profit margins. Nevertheless, the government has undertaken large scale economic spending programs for revival of the economy. While its impact remains doubtful, there will be a massive increase in the governments borrowing program to worsen fiscal health. However, the countrys huge foreign exchange reserves will provide some leeway to the government in managing the economic crisis.
Evolution
Pre 1950
Japans economic roots lie in its early industrialization. Japan has gone through two phases of economic development. One started in 1868 and continued till World War II, and another began in 1945 and continued into the mid-1990s. In 1868, the Tokugawa government became the first government to open up the country to Western ideas and industrialization. During 18681912, the government had already adopted a Western system of education. The government also built roads and railways to further enable economic development. It also opened up the market to private enterprises and encouraged them to participate in economic activity. 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 that still dominate in Japan. The government emerged as chief promoter of private enterprise, enacting a series of favorable business policies, including low corporate taxes. In this period, the economy grew moderately and relied on traditional agriculture to finance industrial infrastructure. By the late 1920s, manufacturing and mining contributed 23% of GDP. The great depression of the 1930s had much less of an impact on Japan than on other industrialized nations, and the country grew rapidly at a growth rate of 5% every year. Though the countrys industrial infrastructure was completely devastated during World War II, it was rapidly rebuilt. The early postwar years were devoted to rebuilding lost industrial capacity; major investments were made in electric power, coal, iron and steel and chemical fertilizers.
195080
By the mid-1950s, production matched pre-war levels. The economy not only recovered its lost momentum, but also surpassed the growth rates of earlier periods. Between 1953 and 1965, GDP increased by more than 9% every year,

Economic landscape
manufacturing and mining by 13%, construction by 11%, and infrastructure by 12%. In 1965, these sectors employed more than 41% of the labor force, whereas only 26% remained in agriculture. The mid-1960s brought in rapid industrial development as the economy was opened to international competition. The country developed heavy and chemical manufacturing plants. Products such as automobiles, ships, and machine tools also assumed new importance. The value of manufacturing and mining grew at the rate of 17% every year between 1965 and 1970. The growth rates moderated to about 8% between 1970 and 1973, and the gap between the service sector growth and industrial growth reduced. New avenues like retail trade, finance, real estate, information services, and other service industries, streamlined their operations. In 1973, Japan faced a severe economic challenge due to the world oil crisis. This shook the Japanese economy, which had become virtually dependent on imports. Japan experienced its first decline in industrial production along with severe price inflation. Changing prices favored conservation and alternative sources of industrial energy. Although the investment costs were high, many energy-intensive industries successfully reduced their dependence on oil during the late 1970s and 1980s, and enhanced their productivity. Advances in micro-circuitry and semiconductors in the late 1970s and 1980s also led to new growth industries in consumer electronics and computers, and to higher productivity in already established industries.
198090
There were continued investments for industrialization throughout the 1980s, with capital investments for equipment accounting for more than 20% of GNP during the period. The country also witnessed the GDP growth rate increase to 4% during the period. R&D developed rapidly during this period, and many Japanese firms became famous for their technological innovations.
19902009
Japan witnessed weak economic performance from the beginning of the 1990s to the end of 2003. This was largely due to over-investment during the late 1980s and the Bank of Japan's failure to cut interest rates. As a result, Japan entered a liquidity trap. To create overall economic stability, Japan ran up massive budget deficits to finance large public works programs. By 1998, Japan's public works projects could not stimulate demand and bring the economy out of stagnation. The Japanese government undertook structural reform policies to even out speculative excesses from the stock and real estate markets. Unfortunately, these policies led to deflation on numerous occasions between 1999 and 2004. The governments financial standing deteriorated during the 1990s, with the overall deficit in 2000 approaching 8% of GDP. As a result, the ratio of public debt to GDP grew from around 60% in 1991 to more than 150% in 2007. Meanwhile, the fiscal deficit has hovered between 67% of GDP since 2001. The structural amendments and expansion in economic activities helped the primary budget deficit to fall from 6.7% of GDP in 2002 to 4% in 2006. The country recorded an average real GDP growth of around 0.6% between 2001 and 2009.

Economic landscape
Figure 6:
Japan historical GDP growth
6.0
4.0
2.0
Growth rate (%)
0.0 1971 1980 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2009 -2.0
-4.0
-6.0 Year
Source: Datamonitor
DAT AMONITOR

Financial system Overview
The main elements of Japan's financial system are similar to other major industrialized nations: a commercial banking system, which accepts deposits, extends loans to businesses, and deals in foreign exchange; specialized governmentowned financial institutions, which fund various sectors of the domestic economy; securities companies, which provide brokerage services, underwrite corporate and government securities, and deal in securities markets; the capital markets, which offer the means to finance public and private debt and sell residual corporate ownership; and money markets, which offer banks a source of liquidity and provide the Bank of Japan with a method with which to implement monetary policy. Japan's traditional banking system was segmented into clearly defined components in the late 1980s: commercial banks (13 major and 64 smaller regional banks), long-term credit banks (seven), trust banks (seven), mutual loan and savings banks (69), and various specialized financial institutions. During the 1980s, a rapidly growing group of non-banking financial institutions (such as consumer loan, credit card, leasing, and real estate organizations) were allowed to perform the traditional functions of banks.

Economic landscape
Financial authorities/regulators
Bank of Japan (BOJ)
The Bank of Japan was established under the Bank of Japan Act (announced in June 1882), and began operating as the nation's central bank from October 10, 1882. The bank was restructured on May 1, 1942 in compliance with the Bank of Japan Law (hereafter the Law of 1942), which was formed in February 1942. The Law of 1942 was revised completely in June 1997, with "independence" and "transparency becoming the two major principles. This law came into effect on April 1, 1998. The Bank of Japan has a three-tier system consisting of the policy board, the highest decision making body; the bank executives and departments; and branches and overseas representative offices. The policy board formulates the guidelines for currency and monetary control. It also sets the basic principles for the Bank's operations and supervises the duties of bank executives. The Bank of Japan law issues banknotes, puts in place currency and monetary controls, and ensures settlement of funds between banks and other financial institutions. The bank also strives towards the pursuit of price stability and development of the national economy. The Financial Services Regulatory Authority
The Financial Services Regulatory Authority (FSRA) is the main regulatory authority of commodities and futures trade in Japan. It works along the guidelines provided by the commodities law of 1993. The FRSA comprises seven commissioners, whose names are put forward by the prime minister. Some of its objectives and functions are: to take all reasonable steps to ensure that the commodities market is fair, efficient, competitive and informed; to develop and implement fair, concise and clear legislation, rules, regulations, guidelines and procedures; to encourage responsible and effective self-regulation by the stock exchange; to ensure the existence of effective risk management measures which are designed and operated in accordance with internationally recognised standards; to maintain contingency plans to deal with potential market disruptions.
The Finacial Services Agency
All insurance companies operate under the supervision of the Financial Services Agency (FSA). The FSA secures the stability of domestic financial institutions and protects depositors, insurance policyholders, and securities investors. The FSA uses the Insurance Business Law (IBL), passed in 1995, to take action against insurance companies. The objective of this law is to protect policyholders' interests by ensuring the sound management of insurance companies and fairness of insurance-soliciting activities.

Economic landscape
Stock markets
The first Japanese stock exchange was founded in 1878 and was later merged with 10 other small exchanges to form one single Japanese stock exchange. The Securities and Exchange Law was enacted in March 1947. This was revised entirely in April 1948. On April 1, 1949, three stock exchanges were established in Tokyo, Osaka and Nagoya. In July of the same year, five additional stock exchanges were established: Kyoto (merged with Osaka Securities Exchange in March 2001), Kobe (dissolved in October 1967), Hiroshima (merged with Tokyo Stock Exchange in March 2000), Fukuoka, and Niigata (merged with Tokyo Stock Exchange in March 2000).
Tokyo stock exchange (TSE)

The TSE is the worlds second largest stock market in terms of market capitalization after the New York Stock Exchange. At the end of 2008, the TSE listed around 2,373 domestic companies and about 16 foreign companies. The TSE had its highest earnings during 1983 to 1990. During this period, the TSE had more than 60% of the worlds stock market capitalization. The TSE works closely with the London Stock Exchange to develop jointly traded products and share technology. The TSE established its own regulations in August 2007, and from November 2007 these regulations became operational. The market capitalization of the TSE stood at around $3 trillion at the end of 2008, a decline of 28% compared to the previous year. However, as of end of August 2009, the market capitalization of the TSE was over $3.4 trillion. Figure 7: Market capitalization of Tokyo stock exchange, 200108
5,000 4,500 4,000 3,500 3,000 $ billion 2,500 2,000 1,500 1,000 500 0 2001 2002 2003 2004 Year
Source: Datamonitor
DAT AMONITOR
2005
2006
2007
2008

Economic landscape
Insurance
The Japanese insurance market has experienced fluctuating growth in its gross premium income over recent years. Between 2005 and 2007 the gross premium income was seen to decline, however the market returned to growth in 2008. Further decline is expected in 2010, followed by slow growth through to 2013. The Japanese insurance market generated a gross premium income of $384.5 billion in 2008, representing a compound annual rate of change (CARC) of -2.1% for the period spanning 2004-08. In comparison, the Chinese and Indian markets grew with CAGRs of 22.9% and 25.3% respectively, over the same period, to reach respective values of $152.6 billion and $57 billion in 2008. Life insurance sales proved the most lucrative for the Japanese market in 2008, generating a gross premium income of $279.3 billion, equivalent to 72.6% of the market's overall value. In comparison, sales of non-life insurance generated a gross premium income of $105.2 billion in 2008, equating to 27.4% of the market's aggregate income. Japan accounts for 45.5% of the Asia-Pacific insurance market's gross premium income. In comparison, China accounts for a further 18% of the regional market's gross premium income. Nippon Life Insurance Company generates 9.7% of the Japanese insurance market's value. In comparison, The Dai-ichi Mutual Life Insurance Co. accounts for a further 6.2% of the market's revenue.
Asset management
The Japanese retail savings and investment market profile covers four non-life retail savings and investment products: deposits, mutual funds, direct investment in equity and direct investment in bonds. The Japanese retail savings & investments market generated total revenues of $8,876.3 billion in 2009, representing a compound annual rate of change (CARC) of -0.6% for the period spanning 200509. In comparison, the French and German markets grew with compound annual growth rates (CAGRs) of 0.6% and 0.5% respectively, over the same period, to reach respective values of $2,066.4 billion and $3,884.9 billion in 2009. The deposits segment dominates the Japanese retail savings and investments market in 2009, generating 81.9% of the market's overall value. The equities segment generated 10.6% of the market's aggregate value. Compared to deposits and equity, mutual funds had a market share of only 3% in the retail savings and investment market.
Key policies
Japan's budget, announced in early April 2010, promises to spend a record trillion dollars. The country is also under pressure to issue a record JPY44.3 trillion (over $475 billion) worth of new bonds this year. The Bank of Japan is buying JPY1.8 trillion worth of long-term JGBs per month to provide liquidity to the market, since the new government took over in late 2009.The governments most important goal is to reduce its debt which has been over 200% of GDP for 2009.
Performance
GDP and growth rate
Throughout the 1960s and 1970s, the Japanese economy maintained high rates of growth to emerge as the worlds second largest economy. However, during the second half of the 1980s, an equity and real estate property price hike lead the country into a recession. Real growth was recorded at below 1% in the early 1990s. Japan tightened its monetary and fiscal policies to control the soaring real estate and stock prices, in order to create a stable investment environment by

Economic landscape
maintaining price stability. By 2000, the economy posted a growth rate of around 3%, and settled down to an average growth rate of 1.7% over 200006. The economic conditions further deteriorated since 2007, when the economy recorded a growth rate of 2%. It plunged into a recession in 2008 with a negative growth rate of 0.4%. The recessionary conditions deepened in 2009, and the countrys economy recorded a recession of 5.4%. Both consumption and investment expenditure have remained weak, however, they are showing signs of revival. Figure 8: GDP and GDP growth rate in Japan, 200213(Real GDP at constant prices)
5,400 5,300 5,200 5,100 5,000

$ billion
4.0 3.0 2.0 1.0

Percentage (%)
0.0 -1.0
4,900 4,800 4,700 4,600 4,500 4,400 4,300 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Year
Real GDP (Constant prices) Growth (%)
-2.0 -3.0 -4.0 -5.0 -6.0
Source: Datamonitor
DAT AMONITOR
GDP composition by sector

Japan has been an industrially active nation ever since it adopted Western technology and gained industrial supremacy in the early years of the 20th century. Although it has 15% of arable land, agriculture was a major source of economic and social sustenance before industrialization. The major contributor to the GDP of Japan is the services sector. In 2009, the agricultural sector contributed a meager 1% to the GDP. The industrial sector's contribution, at 27%, was more significant. But the services sector contributed a colossal 72% to the economy of Japan.

Economic landscape
Figure 9:
Sector specific GDP in Japan, 2009
Agriculture 1% Industry 27%
Services 72%
Source: Datamonitor
DAT AMONITOR
Agriculture
Agriculture, forestry and fishing dominated the Japanese economy through the 1940s, but thereafter declined in relative importance. In the late 19th century, these sectors had accounted for more than 80% of employment. Employment in agriculture declined in the pre-war period, but the sector was still the largest employer, with about 50% of the work force, by the end of World War II. Its share of the work force further declined to 23.5% in 1965, 11.9% in 1977, and to 4 % in 2009. There was a rapid decline in agriculture's share of economy, with the share of net agricultural production in GNP coming down from 4.1% to 3 % between 1975 and 1989. By 2009, the share had further decreased to just 1% of GDP. Japan is self sufficient in rice, and the sector is well subsidised. Japan also has one of the worlds largest fishing fleet, and accounts for nearly 15% of global fishing output. During 200209, growth rate of agricultural output has been negative, with 2007 being an exception.

Economic landscape
Figure 10:
Agriculture output in Japan, 200209
9,000 8,000 7,000
2.00
0.00
-2.00 6,000
Yen billion Growth rate (%)
5,000 4,000 3,000
-4.00
-6.00
-8.00 2,000 1,000 0 2002 2003 2004 2005 2006 2007 2008 2009 Year
Agriculture output
Source: Datamonitor
-10.00
-12.00
Growth rate
DAT AMONITOR
Industry
Due to early industrialization, Japan has seen stable growth over a period of time in the industrial sector. Manufacturing has been the primary driver of Japan's economy since the 1960s. Currently, the manufacturing sector accounts for more than 20% of the countrys GDP. The sector is primarily dominated by the electronics and automotive industries. In addition, Japan is the world's largest manufacturer of machine tools, most of which are exported to countries such as the US and South Korea. Japan is home to some of the most significant iron and steel makers, like Nippon Steel, which is one of the worlds largest producers of steel. Japan is also one of the worlds largest producers of motor vehicles, and those that it produces are considered technologically advanced. Japan also is one of the largest exporters of semiconductors, electrical machinery and chemicals. After attaining negative growth rates during 200103, there was a marked recovery in 2004. However, the recovery was short-lived and the economy, along with the manufacturing industry fell into the negative zone again in 200809. The downward trend has continued in 2009. According to the monthly economic report (April 2009) of the government of Japan, industrial production is decreasing substantially due to the decrease in business investments and the lower demand for exports. As for short-term prospects, while demand is decreasing and the inventory ratio is increasing remarkably, the tempo of decrease in production is likely to moderate as inventory adjustment progresses. The industrial output contracted by 6.6% in 2009.

Economic landscape
Figure 11:
Industrial output in Japan, 200209
150,000 145,000 140,000 135,000

Yen billion
4.00
2.00
0.00
Growth rate (%)
-2.00 130,000 -4.00 125,000 120,000 115,000 110,000 2002 2003 2004 2005 2006 2007 2008 2009 Year
Industrial output Growth rate
-6.00
-8.00
-10.00
Source: Datamonitor
DAT AMONITOR
Services
Japan's service sector includes some of the major industries such as banking, insurance, real estate, retailing, transportation, and telecommunications, and accounts for 72% of the GDP. Japan's financial sector has some of the largest financial services companies, business groups and banks in the world. Companies such as Sony, Sumitomo, Mitsubishi and Toyota own major banks in the country. Like manufacturing, services output has also been on a declining trend since 2005. In 2009, the service sector declined by over 6%.

Economic landscape
Figure 12:
Services output in Japan, 200209
370,000 365,000 360,000
3.00 2.00 1.00 0.00
355,000
Yen billion
-1.00 -2.00 -3.00 -4.00 -5.00
Growth rate (%)
350,000 345,000 340,000 335,000
-6.00 330,000 325,000 2002 2003 2004 2005 2006 2007 2008 2009 Year
Services output
Source: Datamonitor
-7.00 -8.00
Growth rate
DAT AMONITOR
Fiscal situation
Fiscal deficit/surplus situation

The government finances of Japan are in a bad shape. Japan's parliament has approved a record JPY1 trillion budget for the fiscal year from April 2010, with an all time high of JPY 44.3 trillion in new bond issuance underlining the countrys dire financial condition. The government is not initiating any stimulus package as there is a risk of a double dip recession. Japans public debt is at a high of 200% of GDP (2009), which is high compared to other advanced economies. A public debt of this order also indicates that the interest payment will further increase if the borrowing costs increases in the future. Moreover, budget deficit for Japan increased from 1.4% of GDP in 2008 to around 5.5% of GDP in 2009. Although the Japanese government had targeted a balanced budget by 201112, deteriorating finances will make it difficult to achieve the target. The budget shows spending on public works projects will drop to a record 18.3% to JPY5.8 trillion - the lowest level in 32 years.
Current account
Japan recorded a current account deficit in January 2009, which was the first such deficit in 13 years. As the recession became deeper and global demand for exports slide, the Japanese economy was hit hard during 2009. The deficit was to

Economic landscape
the extent of $1.8 billion in January 2009. Japans export driven economy has taken a beating in recent years because of a dip in demand for cars, high-tech goods and machinery. However, the countrys current account surplus in February 2010 rose by 29.6% from a year earlier to JPY1.471 trillion ($22 billion), underpinned by growing demand for Japanese products overseas. It marks the seventh straight month of year-on-year improvement in the current account balance. Japan has seen a current account surplus for 13 straight months starting February 2009.
Figure 13:
Current account position in Japan, 200108
250.00
6.0
200.00
5.0
4.0 150.00 $ billion 3.0 100.00 2.0 50.00 Percentage
1.0
0.00 2001 2002 2003 2004 Year Current account balance

Source: Datamonitor
0.0 2005 2006 2007 2008
Current account balance as % of GDP

DAT AMONITOR
External trade
Japan is an export-oriented country and thus has always had a balance of trade surplus during 19852008. Japan is also one of the strongest players in the world market in terms of trade and the value of its currency, the yen. In monetary terms, Japan is the fourth largest exporter and sixth largest importer of goods and services in the world. Japanese exports have consistently been on a growth path since 2000, recording an average annual growth of 9.6% during 200408. Imports registered an annual average growth of 9.6% during the same period. However, Japans external trade performance has declined since the beginning of 2009. Exports receded by 46.3% in January 2009, while imports fell by 31.7% compared to the corresponding period of the previous year.

Economic landscape
Japan mainly exports cars, electronic devices and computers. In 2008, its single most important trade partner was the US, with a share of around 17.8% in Japans exports. Other major export destinations include China (16%), South Korea (7.6%), Taiwan (5.9%) and Hong Kong (5.1%). The most important import goods are raw materials such as oil, foodstuffs and wood. Major suppliers include China, with a share of 18.8%, followed by the US (10.4%), Saudi Arabia (6.7%), the UAE (6.1%) and Australia (6.2%).Countrys exports decreased from over $925 billion in 2008 to less than $808 billion in 2009. Imports also fell from $930 billion to $846 billion during the same period.
Figure 14:
Japans external trade , 200209
2000.0 1800.0 1600.0 1400.0 1200.0
$ billion
1000.0 800.0 600.0 400.0 200.0 0.0 2002 2003 2004 2005 Year
Exports Imports Total trade
DAT AMONITOR
2006
2007
2008
2009
Source: Datamonitor
International investment position
Foreign direct and portfolio investments

Foreign investment in Japan is relatively low compared to other major economies, like the other G7 countries and China. The FDI as a percentage of GDP stood at 0.1% for the period 200408. Since 2001, the Japanese government has recognized the need to increase the countrys stock of FDI as one of its priorities. In 2003, the Ministry of Economy, Trade and Industry started a project to support activities that attract foreign investments, especially FDIs. As a part of that project, several trade barriers were removed. As a result of positive measures, Japans FDI stock has grown from less than 1% of

Economic landscape
GDP in 2001 to around 3% at the end of 2008. Although FDI inflows increased during 200105, the economic downturn has adversely affected the FDI inflow in the country. In 2006, there was negative growth in Japans FDI inflow but picked up in 2007, when it stood at $19 billion. In 2008, the FDI inflows again decreased to around $14.5 billion. Global slowdown has adversely affected the FDI inflow into the country. Japans outward FDI flow has increased from around $31billion in 2004 to $73.5 billion in 2007. In recent years, large cash holdings of Japanese companies and the strengthening of yen has further helped outward FDI activities. However, the slow global recovery raises many difficulties for both international businesses and governments around the world as to how to cope with the drastic reductions in consumption and corporate investment in order to be able to revive each national economy as soon as possible. All of those influences will directly depress the amount of global M&A transactions that will be seen in 2010. In the past decade, most foreign direct investment in Japan was directed towards the manufacturing sector (40%, half of it in machinery), followed by services (31%), retail and wholesale trade (22%), and finance and insurance (4%).

Economic landscape
Figure 15:
FDI inflow in Japan, 200208
25.00 20.00 15.00 10.00 5.00 0.00 2002 -5.00 -10.00 Year -7.71 2003 2004 2005 2006 2007 2008 9.25 6.40 2.73 18.90 14.45
$ billion
8.04
Source: Datamonitor
DAT AMONITOR
Credit Rating
In April 2010, Standard & Poors retained its 'AA' long-term and 'A-1+' short-term local and foreign currency sovereign credit ratings for Japan. The outlook is downgraded to negative. According to the rating agency, the countrys debt which is over 200% of GDP, and decreasing public finances are a cause for concern which has given rise to a negative outlook.
Monetary situation
Overview
The Bank of Japan is the country's central bank and implements monetary and credit policy. Its monetary policies are framed with the objective of maintaining price stability and inflation.
Key monetary indicators

Inflation

Economic landscape
The CPI inflation rate was negative during 200205. It increased to 0.3% in 2006, but fell to 0.0% in 2007. However, it registered an increased in 2008 to reach 1.5%. The economy is currently going through a deflationary phase. The Japanese economy recorded a deflation of 1.7% in 2009 and it is expected the country would remain in deflation for most of 2010.
Figure 16:
Consumer price index and CPI-based inflation in Japan, 200213
100.00 99.50 99.00
2.00 1.50 1.00 0.50
Consumer price index
98.50
Inflation (%)
98.00 0.00 97.50 -0.50 97.00 96.50 96.00 95.50 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Year
Consumer price index Inflation
-1.00 -1.50 -2.00
Source: Datamonitor
DAT AMONITOR
Money supply and Interest rate

The key measure of Japans money supply M2 was around JPY763 trillion ($8.18 trillion) in February 2010. M2 consists of cash in circulation, demand and time deposits, and certificates of deposit (CDs) at domestic banks including the BOJ and Japanese branches of foreign banks. The balance of CDs surged 11.4% from January 2010 to JPY26.5 trillion (284 billion) in February 2010, while the balance of quasi-money, which largely consists of time deposits, rose 2.6% to JPY553.8 trillion ($5.9 trillion). M1, which refers to cash in circulation and demand deposits, increased 0.9% to JPY482.7 trillion ($5.17 trillion). M3, a wider gauge that corresponds to M2 plus CDs at all depository institutions, including Japan Post Bank, was up 2.0% to JPY1, 063.1 trillion ($11.4 trillion).

Economic landscape
For the first time in seven years in October 2008, the Bank of Japan slashed its benchmark interest rate from 0.5% to 0.3%. The move followed interest rate cuts by the central banks globally. Again in December 2008, the Bank of Japan cut interest rates to 0.1%, which has not been changed until April 2010.
Banking sector
The banking system of Japan is one of the largest in the world. The Japanese banking structure consists of three mega banks, regional banks, foreign banks, trust banks, governmental institutions and Shinkin banks. As of 2007, there were about 1,696 banks. According to Bank of Japan, the combined assets registered a quarterly decline of 1.76% in the third quarter of 2008, while the loans grew slightly by 0.11%. Mergers have also played a vital role in restoring stability and keeping those financial institutions profitable. The Japanese banking system offers a wide range of payment methods for both its private and corporate customers. The Bank of Japan (BOJ) is an important player as a provider of settlement assets and an operator of payment and settlement systems. BOJ-NET funds transfer system and BOJ-NET JGB Services in particular registered the highest level of activity in terms of value and volume. Some of the private-sector systems prevalent in Japan are Foreign Exchange Yen Clearing System (operated by Tokyo Bankers Association) and Continuous Linked Settlement. In light of improvements in trading and settlement activity, Bank of Japan will continue to work on enhancing the arrangements and infrastructure, and encourage participants and operators of payment systems to develop the operational capabilities. The banking sector in Japan has seen a downturn following the Asian financial crises of 1997. Most of banking assets lie in bonds which come to around 25% of total assets. Due to the downturn in the stock market, the commercial banks are facing tough times. Although the banks are making considerable efforts to improve the sector, the factors leading to slowdown are their high fees structure and poor customer service. Japan's six major banking groups are expected to report a sharply improved aggregate net profit of more than JPY1 trillion ($10.7 billion) for the year ended March 31 2010. Mitsubishi UFJ Financial Group Inc, Sumitomo Mitsui Financial Group Inc, Mizuho Financial Group Inc, Resona Holdings Inc are expected to post profits for the year ended 2010. The six groups also include Sumitomo Trust and Banking Co and Chuo Mitsui Trust Holdings Inc. Mitsubishi UFJ and Sumitomo Mitsui are expected to each report net profits of around JPY300 billion (over $3 billion), while Mizuho Financial Group Inc is has estimated earnings around JPY200 billion (over $2 billion).
Employment
The Japanese work force is generally well-educated, thanks to the country's excellent education system. The labor force participation rate (LFPR) was recorded at 81% at the end of 2008, higher than most other countries, and the total labor force was put at around 65.93 million in 2009. At least 53% of the total population has been economically active since 1995, and this trend is predicted to continue till 2010.These figures make Japan a labor-efficient country, which is able to make effective use of its manpower. The percentage increase in labor force was only a few points above the percentage increase in the total population in 2009. Furthermore, the population showed a negative growth, and the labor force did not go down in tandem. Employment in the three economic sectors agriculture, industry and services, has been in proportion to their output levels. Economic downturn has adversely affected employment generation in Japan. Large scale layoffs in the manufacturing industry have added to unemployment. Japans unemployment rate reached to a seven-year high of 4.8% in

Economic landscape
March 2009. According to the government sources, there was an increase in the jobless population for the fifth straight month. The total number of unemployed population climbed to 3.3million people in 2009. Moreover, it was the first time since 2006 that the number of unemployed has exceeded the three-million levels. It is expected that the unemployment rate is going to surge up to 5.4% in 2010. Figure 17: Unemployment trends in Japan, 200213
4.0 3.5
6.0
5.0
Number of Unemployed (in million))
Rate of unemployment (%)
3.0 2.5 2.0 1.5 1.0 0.5 0.0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Year
Total Unemployment Unemployment rate
4.0
3.0
2.0
1.0
0.0
Source: Datamonitor
DAT AMONITOR
Outlook
The Japanese economy has been locked in a deflationary cycle for much of the last decade, except for the year 2008. This deflation, which has its roots in the initial asset price correction in the early 1990s, has had a number of potentially disastrous consequences. The deflationary pressure led to a fall in asset prices, insolvent companies and banks. In 2009, due to recession, the deflationary pressures deepened with country recording a deflation of -1.7%. Due to strong Yen, the deflationary pressure is expected to continue even in 2010. Japanese exports, which contribute around 16% to the GDP, will remain subdued, which provides little scope for recovery. The government aims to release a mid-term fiscal reform plan and to finalize a growth strategy in June 2010. Failure to make those policy guidelines credible could disappoint nervous bond investors and push up JGB yields Furthermore, the BOJ eased its loose monetary policy in March 2010 by doubling the size of a national funding operation launched in December 2009 to JPY20 trillion ($216 billion). The central banks main intent is to pump funds into the market and

Economic landscape
normalize the deflationary trend in the economy. Though independent by law, the central bank is required to work closely with the government to align policy and has in the past caved in to government pressure. Unless the upper house elections in July 2010 have a positive outcome of political stability, it makes it harder for BOJ to formulate policy. Despite a record announcement of JPY 1 trillion budget for the year 2010 with an issuance of new bonds worth 44.3 trillion yen ($477.6 billion). Meanwhile, the government is still resisting pressure to spend more for the fragile economy. With gross public debt having risen to over 200% of GDP in 2009, measures to reduce the large government budget deficit are currently under consideration. However, government finances are under increasing pressure due to the proposed stimulus measures.

Social landscape
SOCIAL LANDSCAPE Summary

Japan is the 10th most populous country in the world. In July 2009, Japans population stood at 127.07 million. The countrys population has been declining since 2005, and will continue to do so until the end of the current decade. Despite the fall in birth rates, the population has not declined by a significant margin due to immigration (14.9% of the population). Most of the Japanese are either Shintoists or Buddhists. The Japanese healthcare and education systems are among the best in the world. The healthcare industry in particular is among one of the most technically advanced worldwide. Japan's standard of education is at par with any of the Western nations, and the countrys educational institutions are equipped with technically advanced teaching staff and well-organized study programs. Heath insurance is compulsory for every citizen. Primary education in Japan is compulsory for children above the age of six, and is provided free of cost up to the age of 15 Japan is reckoned to be a relatively equal society in terms of income distribution and individual income. However, the rich/poor divide is widening due to globalization, the ageing population and labor dualism. Unemployment is not a major problem afflicting the Japanese public.
Evolution
Japan accounts for 2% of the worlds population. Japans population has been on the decline since 2005, a fact that has become a major cause of concern for the authorities. The decline in population can be attributed to various interrelated demographic factors like birth rates, death rates and fertility rates. While both birth and death rates have been declining since 2002, the birth rate is dropping faster, with detrimental consequences to the already diminishing population of Japan. In terms of direct impact to economy, a decrease in the size of the economically-active sector of a population exerts downward pressure on economic growth. As a result, the government implemented a policy named the Angel Plan in 1994, which encouraged people to have children with allowances for child care, increased number of child care centers, and child care leave available to all citizens. In 1997 and 1998, the working hours were reduced to 40 hours per week, and a restriction on night work was implemented under child welfare law. In 2000, childcare leave payments were raised to 25% 40% of wages. The social insurance system in Japan comprises employee health insurance for salaried workers and national health insurance for self-employed and unemployed people. The insurance system is managed by the social insurance agency in Japan.

Demographic composition
Composition by age and gender

Japan is the 10th most populated country in the world, with a recorded population of more than 127.08 million people. The population density in Japan is 337 people per sq km, which makes the country the 30th most densely populated nation in the world. In Japan, around 13.5% of the population belongs to the 0-14 age group, around 64.3% of people belong to the 15-64 age group and about 22.2% are in the 65 years and above category. The sex ratio at birth is 1.06 males to every female born.

Social landscape
Table 12:
Mid-year population by age (millions) in 2009

Female 2.5 2.9 2.9 3.0 3.3 3.7 4.4 4.8 4.2 3.8 3.9 4.7 4.7 4.3 3.7 3.2 5.1 Male 2.7 3.0 3.1 3.1 3.5 3.9 4.5 5.0 4.3 3.9 3.8 4.6 4.5 3.1 2.4 2.6 2.7 DAT AMONITOR
Mid-year population by age 04 59 1014 1519 2024 2529 3034 3539 4044 4549 5054 5559 6064 6569 7074 7579 80+
Source: Datamonitor
Urban/ rural composition and immigration

Japan is all-but completely urbanized nation, with only about 5% of the population involved in agricultural activities. Many farmers of Japan work on a part time basis in the nearby cities and towns and these form the floating population. With a population of more than 35 million, Tokyo is one of the biggest cities of the world. The government has built regional cities like Saitama, Chiba, and Kanagawa around Tokyo to discourage people from moving into Tokyo. Similarly, the government has also built cities around other urban centres like Osaka and Kyoto to avoid migration. Japan has followed a close-door policy with respect to immigration. Unlike other advanced economies like the US and the UK, the Japanese government did not encourage foreigners to enter the work force. Since 2005, the population began to decline with a negative growth rate of around 0.19% (2009). Lower birth rate would create imbalances in the countrys demographics. As per the current growth rate, the population will decline by more than 25% by 2050. The Japanese government is planning to lift restrictions on immigration to prevent future demographic crisis and tide over problem of an aging population. A small beginning has been made by allowing 1,000 Filipino nurses to work in Japan. There are also discussions regarding increasing the number of foreign students in Japan, as it will add to the pool of skilled labor.
Religious composition
Shinto and Buddhism are the major religions of Japan, with each claiming equal share in a total of 84%. Other religions account for 16%.

Social landscape
Figure 18:
Major religions in Japan as of 2008
Other 16%
Shinto and Buddhist 84%
Source: Datamonitor
DAT AMONITOR
Education
Overview
The Japanese take pride in their high-quality educational system. Japan boasts a 100% literacy rate since 2005, and has one of the highest rates of university enrolment in the world. The earliest kind of formal education in Japan began with the Chinese bringing in their education system into the country, which was later reformed when students and scholars were sent to European nations to learn their teaching techniques. After World War II, the Americans transformed the Japanese education system by westernizing it. Science and technology have become a priority among students and teachers.
System of education
Japan provides free and compulsory primary education to all citizens. Preschool starts at the age of three. Primary education is undertaken between the ages of six and 15, and secondary education between 15 and 18. After secondary education, students can opt to either work or take up tertiary education. Tertiary education consists of either a four year university degree course or a two year college course. There are very few drop-outs in the system. Although secondary education is not compulsory, at least 94% of those who finish primary school opt to go on to secondary level, and at least

Social landscape
40% enroll in tertiary education. The basic education system was modeled on a mixture of the British, French and American systems, the latters role being the most prominent. Higher education
There are about 500 universities in Japan. According to the world university rankings by the UK Times, about 11 Japanese universities rank among the top 400 universities in the world. The University of Tokyo and Kyoto University were ranked 19th and 25th in 2010.
Healthcare
Healthcare services
The healthcare system is a highly regulated system. Japan spends around 7% of its GDP on the national healthcare. The Japanese government endorses a mandatory universal health insurance system, and also provides free screening and examination of prenatal and infectious diseases. The healthcare system is well equipped with state-of-the-art technology. It is mainly centralized in urban areas, and efforts are ongoing to decentralize at regional levels. The healthcare industry is made up of both public and private services, but is dominated by private physicians and hospitals. About 80% of Japan's healthcare facilities are privately run hospitals, and only 20% are public-owned, state-run and teaching hospitals.
Social welfare
Social welfare policies

Health insurance is mandatory and health insurers are required, by law, to offer a basic package of benefits to every Japanese citizen. There are three systems of insurance and health coverage for people depending on their employment and social status. Firstly, all the employed people in Japan are offered an insurance scheme from their employers called Employee Health Insurance (EHI). This system is funded both by employers and employees. The former contribute around 5080% of the cost, and the remaining amount is deducted from the employee's monthly salary. Secondly, there is the National Health Insurance (NHI) program in place for the unemployed, self-employed and retired. The NHI system is funded by the government and employed members of the system. The self-employed pay roughly 37% of the premium. Finally, there is also long-term insurance especially for the older population, half of which is funded by the government and half by individuals aged 40 or older. To qualify for this insurance, patients must be certified as in need of long-term care by a regional review board.
Performance
Healthcare
Government expenditure on the healthcare sector was nearly 6.34% of GDP in 2009. The total healthcare expenditure was around $316 billion in 2009.

Social landscape
The OECD report (How does Japan compare, 2008) also mentions that Japan has fewer physicians per capita than most other OECD countries. In 2006, Japan had 2.1 practicing physicians per 1,000 population, well below the OECD average of 3.1. The relatively low number of doctors per capita in Japan is partly due to government policies fixing limits on the number of new entrants in medical schools. Furthermore, Japan had 9.3 nurses per 1,000 population in 2006, a figure slightly below the OECD average of 9.7. However, Japan had the highest number of acute care hospital beds of all OECD countries, with 8.2 beds per 1,000 population in 2006, more than twice the OECD average (3.9).
Figure 19:
Expenditure on healthcare in Japan, 200213
400.00 350.00 300.00
7.20 7.00 6.80 6.60
Percentage (%)
250.00
6.40 6.20 6.00 5.80
$ billion
200.00 150.00 100.00
5.60 50.00 0.00 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Year
Expenditure
Source: Datamonitor
5.40 5.20
Total expenditure on health as % of GDP

DAT AMONITOR
Income distribution
Standard of living
Japan is considered to be a modern, prosperous and socially equitable country with a Gini index of 0.38. The index gives a value between 0 and 1, with a lower the value denoting better equality in the individual incomes of the citizens of a country. Japan was traditionally considered to be an egalitarian society, with 90% of the population belonging to the middle class. However, the situation has been changing since 1980s, as a report from the OECD notes that during 19802000, income inequality in Japan rose twice as fast in Japan as in other OECD nations and the rate of relative poverty was among the

Social landscape
highest of any OECD nation. A poor economic growth has further widened the income gap. In order to save costs, Japanese companies are resorting to hiring temporary workers in large numbers. By the end of 2008, one-third of total employed population was non-regular workers. The OECDs Economic Survey of Japan, 2008 notes that while non-regular employment reduces costs for firms, it also creates equity and efficiency concerns.
Education
According to the 2002 census, 99% of the population were literate in Japan. Both males and females had a literacy rate of 99% in the country. Government expenditure on education in Japan was consistently above 3.5% of GDP during 200208. According to the 2008 edition of "Education at a Glance: OECD Indicators", the ratio of Japan's budget for education to GDP in 2005 was only 3.4%, which was amongst the lowest in the OECD nations. The OECD average was 5%. In 2009, education expenditure stood at around $243 billion, at 4.9% of GDP. Furthermore, Japan's educational expenditure accounted for 9.5% of total government spending, falling much below the OECD average of 13.2%. On the other hand, the private share of Japan's educational expenditure was 31.4%, which was significantly higher than the OECD average of 14.5%. The tertiary education system of Japan needs to be reformed to meet the changing global requirements. The usage of English language in Japanese universities is also being stressed upon to increase chances of Japanese students in global firms.

Social landscape
Figure 20:
Expenditure on education in Japan, 200213
300.00
6.0
250.00
5.0
200.00
4.0
Percentage (%)
$ billion
150.00
3.0
100.00
2.0
50.00
1.0
0.00 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Year
Government expenditure
Source: Datamonitor
0.0
Government expenditure on education as % of GDP

DAT AMONITOR
Outlook
The Human Development Index (HDI) 2009, according to the UNDP, for Japan is 0.960, which puts the country in the 10th position out of 182 countries. The high ranking indicates the above average standard of living for Japanese people. However, the countrys major concern in the social sector is the rapidly ageing population. Japan ranks number one, followed by European countries on the worlds list of the 15 oldest countries. The healthcare department of the Japanese government is facing problems such as the rapidly ageing population, a large percentage of nicotine addicts, the threat of HIV/AIDS spreading unabated, and the lack of preventive healthcare. Furthermore, the younger section of society is becoming outnumbered by the older population, with the government unable to fund the insurance needs of the elderly. The governments plans in encouraging immigrants have received lukewarm response because of the economic meltdown. The economic slowdown has also left the Japanese population grappling with the problems of unemployment and deteriorating income levels. Moreover, the Japanese healthcare and education system does not match favorably with other advanced economies mainly because of lower expenditure in these sectors. Few steps have been initiated to reform the educational system. For instance, universities have been granted more flexibility. However, a lot more needs to be done to reform the educational system in Japan. Similarly, with the increasing burden of an ageing population, the healthcare system also calls for significant reforms.

Social landscape
In the recent parliamentary deliberations on social policy, Prime Minister Yukio Hatoyama has pledged to transfer funds by offering families $140 a month per child and free tuition at public high schools starting April 2010. Furthermore, in March 2010, at a plenary meeting, the Upper House adopted a new legislation scrapping tuition fees for high schools by a majority vote led by the three-way ruling coalition of the DPJ, the Social Democratic Party and the People's New Party. The bill was also backed by opposition New Komeito and the Japanese Communist Party. No fees will be charged for students going to public high schools from April 2010. To support students at private high schools, JPY118,800 ($1,275) to JPY237,600 ($2,551) in annual subsidies will be provided per student to school operators. During the same period, the Upper House passed into law a bill to relax conditions for part-time and other non-regular workers to receive jobless benefits in the public sector. As a result, an estimated 2.55 million workers will become eligible for the benefits. The government is taking all aspects of social problems into review, but the burgeoning pension expenditure still remains a huge problem to the government.

Technological landscape
TECHNOLOGICAL LANDSCAPE Summary

Technology has been one of the principal factors that have driven Japans competitive advantage. Japan is the second most technologically advanced country in the world today, after the US. It has proved its mettle in the field of R&D and with advanced technological innovations like robotics. Japan has been trying to reduce foreign funding in R&D activities and so has strived to set up its own facilities. By the end of 2007, government expenditure on R&D was 3.37%. Government support to the development of the telecommunication industry has been vital, with the sector being one of the most technologically advanced in the world. The telecoms industry is the highest revenue-generating sector of the Japanese economy, and Japan boasts the highest mobile phone penetration rate in the world. It ranks 15th in the list of internet penetration. Japan has fostered an atmosphere for evolving new and indigenous products, which has resulted in Japan filing for a high number of patents in 2008, just ahead of countries like Germany, Italy and France.
Evolution
Japan is one of the most scientifically and technologically advanced countries in the world. Its technological superiority is undeniable on the global front. Early in the 1980s, Japan realized the need to break free from its dependence on foreign research for its technological developments and thus started a period of advancement known as the Era of Technological Independence. In 1995, the Ministry of International Trade and Industries (MITI) started to fund national research projects of the research and development (R&D) sector. These projects cover areas like neural computers, intelligent manufacturing, basic technologies for future industries, superconductivity, solutions to energy security, and improving quality of life with limited resources. The main objective of these R&D policies is to successfully carry out the R&D activities planned for the future within the set financial and industrial constraints, and take the technological progress to a higher level. The MITI, however, takes the lead as a supporter of R&D and international research co-operation. As on 2007, the government expenditure on R&D stood at 3.4% of the total GDP. This was the highest recorded percentage in Japan's history, and is expected to increase in years to come.

Intellectual property
Japans desire to maintain its reputation for originality is reflected in the number of patents filed by the country every year. Japanese patent law is based on the first-to-file principle, and is mainly given force by the Patent Act of Japan, which consists of 204 articles. A patent passed by the government comes into force by being registered under Article 66, once the first three years' annual fees have been paid. The commissioner issues the patent certificate to the filer, and the patent is valid for 20 years from the filing date. Japan has a highly dynamic and active R&D sector that is constantly thriving to outperform itself by inventing new and more technologically advanced products and services. Statistics show that of all new patents filed in the world annually, at least 40% belong to Japan. In 2008, Japan has filed 38,066 patents with USPTO, one of the highest in the world.

Research and development

While most research in Japan is carried out by private agencies, research institutes and universities are abundantly funded by the government and its ministries. Japan donates a greater percentage of its GDP into the R&D sector than most of its European and American counterparts. It employs more scientists than the French, British and Germans put together. The number of personnel involved in R&D as of March 31, 2008 was 1,055,200, an increase of 0.3% over the previous year. Out of this work force, an estimated 11.9% were female researchers. The priority sectors wherein R&D is carried out extensively are: Information Technology (IT), computer hardware, semiconductors, nanotechnology, environment, precision machinery, transportation equipment, electrical machinery, electronic parts and devices, drugs and medicines.
Technology agreements/ pacts

Japan has had a technology agreement with the US since 1980. Both the countries are involved in R&D of information sciences, manufacturing technologies, automation and process control, and superconductors. In a recent meeting of the Japan-US working level committee in July 2007, the countries have jointly agreed to jointly explore the areas of environmental science, nanotechnology and energy. The countries have also agreed to exchange researchers for this initiative. In the same month, Japan entered into an agreement with Switzerland (Swiss Federal Council). The countries have agreements to mutually exchange various research and development initiatives, and protect intellectual property. A science and technology agreement between Japan and India took place in 2006, in which the two countries agreed to strengthen their co-operation in R&D. The countries have extended their co-operation into information and communication technology (ICT), biotechnology and nanotechnology. Apart from these countries, Japan also holds technology agreements with Germany, the Netherlands, Vietnam and Egypt, among others.
Performance
Opportunity sectors
Automotive technologies and electronics are two main sectors in which Japan is ahead of every other country in the world. Furthermore, Japan has also contributed to the fields of machinery, robotics, optics, chemicals and semiconductors.
Telecommunications, broadband and internet

Telecommunications
The Japanese mobile phone market generated total revenues of $13.6 billion in 2008, representing a compound annual growth rate (CAGR) of 2% for the period spanning 200408. In comparison, the Chinese and Indian markets grew with CAGRs of 27.5% and 21.2% respectively, over the same period, to reach respective values of $25.5 billion and $5.2 billion in 2008.
The performance of the market is forecast to accelerate, with an anticipated CAGR of 2.4% for the five-year period 200813, which is expected to drive the market to a value of $15.3 billion by the end of 2013. Comparatively, the Chinese and Indian markets will grow with CAGRs of 16.4% and 17.8% respectively, over the same period, to reach respective values of $54.3 billion and $11.8 billion in 2013.Japan was also the first country to introduce wireless internet (i-Mode, in 1999), camera-phones, 3G (in 2000) and 3.5G (2003);

The fixed line phones had a negative growth rate of 3% in 2009.
Figure 21:
Growth of mobile and fixed line telephones in Japan, 200213
14.0
9.0
Growth rate (%)
4.0
-1.0
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
-6.0
-11.0 Year
Mobile phones
Source: Datamonitor
Fixed lines
DAT AMONITOR
Broadband and internet
In 2009, there were about 100 million internet users in Japan; however the growth was just around 3%; The Japanese internet access market generated total revenues of $7.7 billion in 2008, representing a compound annual growth rate (CAGR) of 6.2% for the period spanning 200408. In comparison, the Indian and South Korean markets grew with CAGRs of 37.6% and 4.2%, respectively, over the same period, to reach respective values of $33.7 billion and $4.8 billion in 2008.

Figure 22:
Number of internet users in Japan, 200213
120.00
25.0
100.00
20.0
Number of users (millions)
80.00 15.0 60.00 10.0 40.00 5.0
Growth rate (%)
20.00
0.00 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Year
Internet users
Source: Datamonitor
0.0
Growth rate
DAT AMONITOR
Biotechnology
The Japanese biotechnology market enjoyed steady expansion from 2003, reaching 8.2% growth in 2007.The Japanese biotechnology market generated total revenues of $17.4 billion in 2007, representing a compound annual growth rate (CAGR) of 7.7% for the period spanning 200307. In comparison, the Chinese market grew with a CAGR of 18.2% over the same period, to reach a value of $5.6 billion in 2007.
The medical/healthcare segment was the market's most lucrative in 2007, generating total revenues of $9.8 billion, equivalent to 56.1% of the markets overall value. The food and agriculture segment contributed revenues of $6 billion in 2007, equating to 34.5% of the market's aggregate revenues.
The performance of the market is forecast to accelerate, with an anticipated CAGR of 8.3% for the five-year period 200712, which is expected to drive the market to a value of $26 billion by the end of 2012. Comparatively, the Chinese market will grow with a CAGR of 24.7% over the same period, to reach a value of $16.8 billion in 2012.

Research and development
R&D expenditure
Based on New Industrial Structure, New IT Reform Strategy, and Strategic Technology Roadmap, the government has decided to conduct R&D in advanced ICT equipment, device platform program and software development. There has been only a marginal increase in R&D expenditures as a percentage of GDP between 2000 and 2007. In 200708, the R&D expenditure was 3.67% of GDP, compared to 3.34% in 2006 and 3.30% in 2005. The total R&D expenditure for 2007 (April 1, 2007March 31, 2008) in Japan were JPY18, 943 billion ($164.7 billion). Out of which R&D expenditures for natural sciences were JPY17, 556 billion ($152.7 billion).
Knowledge base
Japan is historically known to be a land of innovation. Over the years, the country has developed many cutting edge technologies by gaining expertise in advanced fields like robotics. The scientific personnel of Japan, who produce these niche technology products, are the most important assets of the country. The number of scientific personnel involved in R&D in Japan grew gradually from around 820,000 in 1995 to around 1,055,200 in March 2008. The growth of R&D personnel has been consistent, with over 800,000 people involved in R&D activities every year during 199508, peaking in 1998 at 911,000.
Outlook
Japan, despite being short on natural resources, was quickly rebuilt after the devastation from the World War II, and has since attained prosperity due to its rapid advances in science and technology, fields that penetrate every aspect of Japanese society. Under the third Science and Technology Basic Plan (200611), a new theme entitled "science and technology to be supported by the public and to benefit society," was adopted by the cabinet council. Under the plan, the total amount of government investment in R&D is targeted to be about $25 billion over a five year period, starting from the fiscal year 2006. The OECD established the Working Party of National Experts on Science and Technology Indicators (NESTI) as a subsidiary organization within the Council for Science and Technology Policy (CSTP). The NESTI is working in Japan to improve methods of collecting internationally comparable data concerning science and technology activities, including R&D, and the development of new indicators. Despite the difficult times that Japan has undergone in the recent times, the country still managed to be on the top in terms of intellectual property rights, by obtaining over 38,066 patents in 2008. However, since November 2009, working groups of the Government Revitalization Unit, created in September 2009 and chaired by Prime Minister Yukio Hatoyama, have been re-evaluating 220 government-funded programs, including dozens of prominent science projects. The government is now committed to shift government expenditure from wasteful projects to initiatives that will benefit the average person, such as ending highway tolls. Since then, the government has been reducing budgets for science and technology. In October 2009, the science and education ministry reduced the total grants for 30 of the projects under the Funding Program for WorldLeading Innovative R&D on Science and Technology (FIRST) from JPY270 billion to JPY100 billion. As a result of the decreasing funds, the R&D activities and the development of priority technologies are likely to be hit in the medium term in Japan.

Legal landscape
LEGAL LANDSCAPE Summary

The legal framework of Japan is based on the German system of civil laws. It uses a unitary judicial system, with ultimate authority residing in the Supreme Court. The justice system is divided into five major categories: summary courts, district courts, family courts, high courts and the Supreme Court. The judicial process is quick, and judges are well educated and expected to make judicious decisions in the interest of the common people. Setting up and running a business is fairly easy, but there is too much regulation. It takes eight procedures and 23 days to get a business up and running in Japan. All Japanese residents have to pay taxes to the government according to their employment status, assets, income and source of income.
Evolution
The Japanese law was historically influenced by Chinese law, but since the 19th century, it has been largely based on the civil law of Germany. Statutory law in Japan is enacted by the National Diet of Japan, along with an approval given by the emperor. The judicial branch is headed by the Supreme Court, which is followed by several high courts, district courts and summary courts. The Supreme Court was established in 1875; it was abolished in 1947 and reinstated under the new constitution of the same year. Japanese statutory law consists of six codes, which include the constitution of Japan (1946), the civil code (1896), criminal code (1907), commercial code (1899), code of civil procedure (1996) and code of criminal procedure (1948). All six of these codes are enacted by the Diet, with the emperor having no power to rescind laws passed by the Diet. Japanese corporate law is based on a corporations code implemented in 2006. This law is very similar to laws in the US, making the process of establishing a company similar to that in America. Companies can be established as business corporations, limited liability companies, limited partnerships, general partnerships and limited liability partnerships, among others. In Japan, the Ministry of Justice was the regulatory authority of the entire legal system until 1947. However, the power concerning the administration of courts was transferred to the Supreme Court in 1948. As a result, the ministry is now composed of six bureaus, namely civil affairs, criminal affairs, correction, rehabilitation, human rights, immigration, and the minister's secretariat.

Judicial system
The current legal system of Japan was put in place after the restoration of the constitution in 1947. The Japanese judicial system was traditionally based on Chinese laws, but later on it adopted the German system of civil law. After the US and its allies had ruled Japan for a brief period after World War II, the country also made changes to the judicial system in accordance to US laws.
Structure of the system

The structure of the legal system is divided into five varying levels of judicial authority. The highest court of justice in Japan is the Supreme Court, followed by the high courts, district courts, family courts and summary courts.

Legal landscape
Figure 23:
Japan judicial structure
Supreme Court
High courts
District courts
Summary courts
Source: Datamonitor
Family courts
DAT AMONITOR
Supreme Court
The Supreme Court is the highest court of authority in Japan. The Supreme Court consists of the grand bench and three petty benches. The grand bench is headed by associate justices, who are appointed by the cabinet with the emperors approval. The petty benches have five justices each, who hear appeals and recommend them to the grand bench. Article 81 of the Japanese constitution authorises the Supreme Court as "the court of last resort with power to determine the constitutionality of any law, order, regulation, or official act". The Supreme Court is also responsible for nominating judges to lower courts, determining judicial procedures, and managing the judicial system. Along with these, the court takes responsibility for the activities of public prosecutors, and for disciplining judges and other judicial personnel. High courts
There are eight high courts in Japan, each monitoring various prefectures. A high court in Japan generally comprises three judges, although they can include five judges in special cases. A president is appointed by the cabinet to manage the affairs of every high court. District courts
In Japan, all the 47 prefectures have a single district court, except the prefecture of Hokkaido which has four courts. The district courts have jurisdiction over civil and bankruptcy cases. The court is headed by a judge, plus two associate judges in certain cases. The district courts defer to the high courts for any other judicial hearings. Summary courts

Legal landscape
The summary courts are presided over by one judge. They mostly have the jurisdiction over small claim civil cases and minor criminal offences. There are about 438 summary courts in Japan. The civil cases pending in the summary courts are appealed in the district courts. Similarly, the criminal cases are appealed in high courts. Family courts
Each district court has a connected family court. In addition to this, there are around 200 family courts in branch offices spread across the country; cases related to family disputes can also be addressed in these branch offices. Although their jurisdiction covers all forms of domestic disputes, they mostly deal with divorce. Their power is limited to mediation and, if there is no consensus, the case must be transferred to a district court.
Legislation affecting business
Industrial acts, legislations and regulations

In Japan, there are more than 190 legal acts covering various areas like the economy, industry, trade, industrial science, commerce, small and medium enterprises, the environment and patents. The most important is corporate law based on the corporations code implemented in 2006. The new corporation law was passed by the National Diet on June 29, 2005 and announced by the government on July 26, 2005 (Law No. 86 of Japan). The principle behind the law is to renew the overall corporate legislation in response to the varying societal and economic conditions. The law is intended to encourage the creation of new companies, and allow more flexible corporate management. Furthermore, the law eases limitations on mergers and acquisitions (M&A), and provides new procedures to protect companies against hostile takeover bids. Corporations in Japan are subject to taxes on their profits. The taxes levied on the income generated by the activities of a corporation include corporate tax (national tax), corporate inhabitant tax (local tax), and enterprise tax (local tax). The corporate inhabitant tax and enterprise tax are pre-determined in Japan, except in instances requiring special treatment. All the taxes are levied based on the provisions for corporate tax. The remittances made by a branch of a foreign corporation to its head office in a foreign country are, in principle, free from taxation. On the other hand, remittances made by subsidiary companies to their parent company are treated as payments of costs/expenses, and distributions of profits or loans (or repayments of loans).
Establishing operations as a foreign enterprise

A foreign company looking at setting up operations in Japan has the option to open any of the following when formulating its entry strategy: Representative office
In Japan, representative offices are established to perform tasks designed to enable foreign companies to engage in fullscale business operations in Japan. These offices are set up to conduct market surveys and other forms of information collection. They also promote and advertise the parent company. However, they are not allowed to engage in sales activities. The establishment of representative offices does not require registration. Furthermore, the representative offices cannot open bank accounts or lease real estate in their parent companys name, so agreements for such purposes have to

Legal landscape
be signed either by the head office of the foreign company, or by the representative at the representative office in an individual capacity. Branch office
To start a business operation in Japan, a foreign company can establish a branch office in the country. The branch office can only operate once a location is assigned, a representative is appointed and other registration procedures are completed. A branch office is not given a legal corporate status in the country, but instead it is included within the corporate status of the foreign company. In general, the foreign company is therefore responsible for all debts and credit generated by the activities of its Japanese branch office. However, the branch office can open bank accounts and lease real estate in its own name. Subsidary company
A foreign company can start a subsidiary company in the country by launching it in the form of a joint-stock corporation, limited liability company, or a similar body stipulated by the Corporate Law of Japan. All types of subsidiary companies can be created by carrying out the mandatory procedures stipulated by law. A subsidiary is a separate corporation from the parent company, so it will bear the liability of an equity participant, predetermined by law for all debts and credit generated by the performance of the subsidiary. Other methods to establish a subsidiary are through formation of a joint venture corporation with a Japanese enterprise or investment company, and by equity participation in a Japanese enterprise. Limited liability partnership (LLPs)
This type of entity is not a corporation, but a partnership formed only by the equity participants, who have limited liability. In this form of partnership, the internal rules can be freely determined through an agreement between the equity participants. LLPs are not directly liable for taxation: instead, taxes are levied on profits allocated to equity participants.
Tax regulations
Japanese taxation is based on the self-assessment system taxpayers must calculate their taxable income, file returns and pay taxes due. The Corporation Tax Law governs the principal taxes that companies pay in Japan. The corporate tax burden is high compared to that of other countries in the region. The national standard corporation tax rate is 30% for all the corporations with capital exceeding JPY 100 million ($1.07 million). There is also local enterprise tax with three components constituting of a 7.2% of taxable profits, 0.48% of a value added factor and 0.2% of share capital and capital surplus. The effective tax rate for corporations is around 41%. Other kinds of corporate taxes are capital duty, payroll tax, real property tax, social security, stamp duty, registration tax and license tax.

Legal landscape
Individual income tax

This tax is paid annually by residents and therefore is also known as resident tax. The amount is calculated on each individual's net annual income. Tax rates can be anywhere within 550% of an individuals income depending on the bracket that it falls into.
Withholding tax
A 20% withholding tax is levied on dividend distributions to nonresidents in Japan, unless the rate is reduced under an applicable tax treaty. The interest on loans paid to a nonresident corporation generally is subject to a 20% withholding tax, while deposits and bonds attract 15%. Royalties paid to a nonresident are also subject to a 20% withholding tax unless the rate is reduced under an applicable tax treaty.
Other local taxes

In addition to the above, other taxes in Japan include consumption tax, property tax, and social security tax. Consumption tax is paid by citizens while purchasing goods and services from retailers and service providers. The present rate of consumption tax is 5% (4% national consumption tax and 1% local consumption tax). Social security tax is a compulsory contributory tax that has to be paid by all employed persons. The amount of tax is determined by their annual income. An employer pays 13.255% and employee pays 12.375% of his income as a social security tax. Finally, the property tax is a municipal tax paid annually by those who own land, houses and other types of depreciable assets.
Labor law
Major Japanese labor statutes include the following: the Labor Standards Law, which regulates working conditions; the Labor Union Law, which guarantees workers the rights to organize, bargain collectively and act collectively; the Labor Relations Adjustment Law, which controls labor management adjustments and means of resolving disputes; the Workers Accident Compensation Insurance Law, which requires employers to insure workers, with premiums borne entirely by the employer; the Welfare Pension Law; the National Health Insurance Law; the Equal Employment Opportunity Law, which guarantees equal opportunities for female employees.
Other relevant laws include the Minimum Wage Law, the Domestic Labor Law, the Job Security Law, the Law on Employment Security for Elderly Workers and the Law Promoting Employment of the Handicapped. The Ministry of Health, Labor and Welfare (MHLW) regulates the administrative guidelines on issues such as applying and interpreting labor laws and enforcing safety rules in the workplace. The Labor Standards Law requires companies to limit working hours to eight

Legal landscape
per day and 40 per week. Longer working hours (usually 46 hours per week) are allowed for the retail and service sectors. Japan has a multi-layered minimum-wage system, which varies by region and industry. Hence 47 basic levels of minimum wage are set annually by local governments, as well as 249 levels of industry-based minimum wage set at the local government level.
Social security charges

In Japan, companies pay retirement allowances at age 60. The workers also receive small retirement allowances every time they change jobs. Japan has a national pension program, and the employer and employee contribute equal parts of a payment of 13.58% of annual salary in the form of monthly installments. There are plans to increase this contribution to 18.30% of annual salary by 2017. Unemployment insurance is an increasingly important part of the typical compensation package. Currently, a salaried worker and the employer share premium payments. The average limit of unemployment benefits is 90300 days. Employers may deduct reserves for severance pay from taxable income, but the tax-free status of such reserves is being phased out over four to 10 years (for small and medium-sized firms).
Corporate governance
Since the 1990s, the Japanese government has been working on regulations to increase transparency in the investment regime. In the initial years, focus was on strengthening of shareholders rights, which later shifted to protection of shareholders of holding companies. In 2001 and 2002, the amendments to the commercial code were aimed at ensuring corporate governance, deregulation of capital procurement and stock system, and use of IT. The amendments to corporate governance were: introduction of a committee system; introduction of a major asset committee system; simplification of shareholders' meetings; rationalization of shareholder class actions.
Further changes were carried out under the new company law and the Industrial Revitalization Law, which allowed allegiance to the international corporate governance system instead of the traditional Japanese statutory auditor (Kansayaku) system of corporate governance.
Performance
Effectiveness of the legal system
Japanese judges are regarded as honest and well-organized. They are politically independent and professionally competent. The Japanese legal system, though, has a lot of ground to cover as far as the depth of justice is concerned. Japan is often criticized for its lack of humanism and poor protection of fundamental human rights. Laws regarding sexual harassment or women's right to continue working after marriage are fairly new in Japan.

Legal landscape
Legal indicators
Doing business in Japan can be a lucrative proposition. It is the worlds second largest economy, with a skilled and hard working labor force, sophisticated infrastructure, and a technologically advanced industry; the above factors make it an attractive place for investments. But it is relatively difficult to start a business or make a direct investment in Japan compared to other developed nations. This is due to a host of regulations and the huge amount of capital required for starting a business. Moreover, getting a business up and running in Japan will take at least 8 procedures and 23 days, making it longer and more complex than setting up a business in Australia (2 procedures, 2 days) or the US (6 procedures, 6 days), according to the World Bank's Doing Business Report in 2010. Japans attractiveness for direct investment can be attributed to deregulation and liberalization of its markets. Japan's Doing Business rank is 18. It takes 15 procedures and as long as 187 days to obtain a license or construction permits in Japan. Registering property and obtaining credit takes 14 and 6 days respectively.
Outlook
The legal climate for foreign investors in Japan is fair and is without any discrimination. The Japanese governments structural reforms in its legal code have made the countrys foreign investment regime attractive. The mergers and acquisitions (M&A) route is becoming the mode of entry into Japan. There was a new law introduced in 2007 on M&A to allow foreign companies to buy Japanese companies in exchange for a stake in their home company. This is a bright opportunity for foreign firms looking to expand into high-growth industries, such as pharmaceuticals and fine chemicals. It will also introduce greater flexibility into M&A transactions, since companies will no longer need to pay cash, thus saving on interest charges. The move is expected to fuel greater M&A activity in Japan, especially in industries that are opening up and that offer attractive returns. The favorable investment climate worked in the Japans favor in attracting FDI despite financial market turmoil in 2008. Furthermore, since April 1, 2009, Japan has also put into effect a new tax law to encourage investments by private equity investors in Japanese corporations by easing off tax burdens on them. The corporate governance laws have also been revised to bring it in line with other developed economies Despite these advantages, corporate and individual income tax rates in Japan continue to be higher compared to other advanced economies. High corporate taxes act as a disincentive for foreign investors. Furthermore, the tax base has remained narrow and has failed to generate revenue to ease the governments financial burden. Any further attempts at rationalization of tax structure may not be possible in the difficult times that the country has been going through. On the Index of Economic Freedom 2010 of the Wall Street Journal, Japan ranks 17th freest economy out of 179 countries. The country is ranked 5th out of 41 countries in the Asia-Pacific region. The export-oriented Japanese economy has long benefited from global trade, although non-tariff barriers exist, the economy scores above the world average in many of the 10 economic freedoms, including business freedom, property rights, freedom from corruption, and labor freedom.

Environmental landscape
ENVIRONMENTAL LANDSCAPE Summary
Japan is the only Asian country which has managed to keep its pollution levels within the acceptable standards of the international pollution control regulations. It has adopted strict measures to counter the problem of waste disposal and energy conservation. Efficient techniques are employed to preserve the environment, as well as to maintain cleanliness, but Japan needs to take tough measures to fight against its persistently rising pollution levels and gradually dwindling natural resources.
Evolution
During the era of early industrialization spanning the decades of 1960s and the 1970s, there was a heavy influx of industrial waste into the water bodies of Japan caused particularly by high population density and industrial activity in the areas surrounding the sea. The Water Pollution Control Law, passed in 1970, revised in 1989 and again amended in 1997, was formulated to prevent underground water pollution by toxic substances, as well as to restrict eutrophication of coastal seas by effluents containing nitrogen and phosphorus flowing into the waters. Air pollution has historically been high in Japan. In order to achieve environmental quality standards for air pollution caused by nitrogen dioxide, the Japanese government had adopted measures based on the Air Pollution Control Law (Law No.97 of 1968). These measures were implemented to protect the health of citizens and provide a secure living environment. Japan also disposes of its waste in a very responsible manner, resulting in a lower water pollution level than any other Asian country.

Environmental regulations
Overview
As Japan became more engaged in industrialization and urbanization, it realized the need to put in place strict policies to protect its environment from industrial waste and pollution, and to conserve the dwindling forest and land area useful for cultivation. Japan's environmental protection regulations are considered to be the most stringent among the Asian countries. The pollution index of Japan hovered between 103 and 110 between 1990 and 2006. According to the United States Environmental Protection Agency (EPA), a reading between 101 and 150 is usually considered unhealthy for certain sensitive groups, but the pollutant levels are in the satisfactory range and pose no acute or immediate health hazard.
Policy
Japan is the only country in Asia that has managed to do a reasonable job in reconciling development and the environment. Air pollution, however, has risen to worrying levels in Japan. Carbon dioxide emissions have steadily been growing without showing signs of reduction. The major gaseous pollutant in the country is nitrogen dioxide, emitted mainly by automobiles. The government has brought out the Law Concerning Special Measures for Total Emission Reduction of Nitrogen Oxides from Automobiles in Specified Areas. Officials plan to increase their efforts to meet the objectives set out in the law, which spells out the responsibilities of the national and local governments, enterprises, and citizens towards preventing such pollution. With regard to the areas that are affected with severe pollution, the law clearly expresses the fundamental

policies and plans for the reduction of the total volume of automobile emitted nitrogen oxide. Finally, the law also establishes nitrogen oxide emission standards for automobiles registered in selected areas, and places a limit on emissions of nitrogen oxide from the use of automobiles for business activities. Japan's Basic Environment Law, enacted in November 1993, sets out basic principles and directions for the formulation of environmental policies. In December of the same year, the National Action Plan for Agenda 21 was submitted to the United Nations. In December 1994, an action plan called the Basic Environment Plan was adopted. The ultimate goal of this plan is to attain a state of sustainable development while continuing to conserve the environment. The long-term objectives are: an environmentally sound material cycle; harmonious coexistence of both economic and environmental goals; the introduction of, and participation in, the Polluter Pays Principle (PPP);
international activities in environmental conservation.
Environmental actions
The 3R policy
Japan has undergone a long period of economic growth, stimulated by mass production, mass consumption, and mass disposal. Consequently, the environmental situation in the country has deteriorated, with limitations such as the shortage of landfill sites for waste, and resource constraints such as the possible depletion of mineral resources in the future. Therefore, the government has adopted a 3R policy (Reduce, Reuse and Recycle) with hopes of creating a recyclingoriented economic system. The policy stresses the importance of reducing, reusing, and recycling different resources. Some companies are positively implementing the concept of the 3Rs at the design and manufacturing stages. However, such initiatives still depend on the efforts of individual companies, and methods are yet to be established for a quantitative assessment of the implementation of the 3Rs.
Global warming countermeasures

As a part of global warming countermeasures, the Japanese government adopted a Voluntary Action Plan in 2007. Under this plan, 28 manufacturing industries (with combined CO2 emissions of 360 million tons) were brought under government scrutiny. In 2007, the emissions by these industries amounted to more than 75% of the total emissions generated by the industrial sector, and 26% of total national emissions. The government has given these industries a target to collectively reduce their emissions by 40 million tons every year, with plans to conduct an evaluation in 2010 and further review these standards. The government has also implemented the Energy Saving Act, which emphasizes rational and efficient use of energy in different industries.
Other environmental laws

Japan has a comprehensive environmental protection framework in place to cover all known hazards of pollution possible, especially in chemical management. The government has put in place the Act on Evaluation of Chemical Substances and Regulation, as well as the Law Concerning Reporting of Releases to the Environment of Specific Chemical Substances and

the Law Concerning Special Measures against Dioxins. Important laws concerning air pollution included the Air Pollution Control Law, the Offensive Odor Control Law, and the Act on Regulation of Emissions from Non-Road Special Motor Vehicles. Noteworthy laws regulating water pollution include the Water Pollution Control Law, the Law Relating to the Prevention of Marine Pollution and Maritime Disaster, and the Law concerning Special Measures for Water Quality Conservation at Water Resources Areas.
Participation in global efforts/agreements/pacts
The Japan Fund for Global Environment (JFGE)

The JFGE is supported by government contributions, individual donations and corporate contributions. The fund has two main programs: a grants program and a NGO support program. The former sanctions grants to NGOs to conserve the environment. The latter offers support to NGOs involved in conservation of the environment, and supports citizens environmental conservation efforts by providing information, research and studies, and training for personnel.
Overseas Environmental Co-operation Centre (OECC)

The Overseas Environmental Co-operation Center, Japan (OECC) was established in 1990, and is supported by the environment agency (currently Ministry of the Environment) of the Japanese government. The OECC promotes international co-operation in environmental research and study. More than 50 countries in all the regions of the world are covered by the OECC studies. The activities mostly involve intensive environmental conservation surveys in various member countries, extensive research and technology development, and various symposiums and workshops on environmental conservation. The activities are funded by the Ministry of the Environment, the Ministry of Foreign Affairs, the Japan International Co-operation Agency (JICA), and the Japan Bank for International Co-operation (JBIC).
International environmental co-operation

As a part of international environmental co-operation, Japan has been instrumental in producing important initiatives. The Environmental Conservation Initiative for Sustainable Development is one of the main proposals, based on the principles of developing environmental technologies and applying Japan's scientific knowledge to the monitoring of pollution, among others. The Japanese government has been making efforts to address global warming, pollution control, fresh water issues and conservation of the natural environment. The Kyoto Protocol is another important contribution from the Japanese government, which sets greenhouse gas (GHG) emission reduction targets for 37 industrialized countries The Ministry of Environment in Japan contributes actively to environmental policy frameworks, along with several other international organizations in the Asia Pacific region such as the Economic and Social Commission for Asia Pacific (ESCAP), the United Nations Environment Programme (UNEP), Asia-Pacific Economic Co-operation (APEC), and the United Nations Centre for Regional Development (UNCRD).

Table 13:
International environmental treaties signed and ratified by Japan

Year of Ratification
International Treaty
Vienna Convention for the Protection of the Ozone Layer, 1988 Montreal Protocol on Substances that Deplete the Ozone Layer Framework Convention on Climate Change Convention on Biological Diversity UN Law of the Sea UN Convention to Combat Desertification in those Countries Experiencing Serious Drought and/or Desertification, Particularly in Africa Kyoto Protocol to the Framework Convention on Climate Change (year of ratification/signature) Cartagena Protocol on Biosafety Stockholm Convention on Persistent Organic Pollutants, 2001
1988 1988 1993 1993 1996 1998 2002 2003 2002 DAT AMONITOR
Source: Datamonitor
Copenhagen conference on climate change

The United Nations Framework Convention on Climate Change (UNFCCC) sets an overall framework for intergovernmental efforts to tackle the challenge posed by climate change. It recognizes that the climate system is a shared resource whose stability can be affected by industrial and other emissions of carbon dioxide and other greenhouse gases. The convention has a universal membership, with 192 countries having ratified the convention. No deal could be clinched in Copenhagen, however, talks on a binding international climate change pact continue in 2010. However, in January 2010, Japan agreed to slash greenhouse gas emissions by 25% from 1990 levels by 2020 on the condition that all major emitters commit to ambitious targets.
Performance
Environmental impact
Japan is the 4th largest producer of CO2 in the world producing approximately 5% of all global CO2 emissions. In 2009, however, the country managed to lower its CO2 emission levels from around 1224 million metric tons in 2008 to around 1202 million metric tons. To reduce emission levels, the Japanese government has instigated many policies which have stimulated co-operation from both consumers and the business community. There is increased awareness of environmental concerns among consumers, corporations and the government. A growing number of companies regard conservation as an essential part of their business strategy, and numerous methods have been developed to support investment in such companies. Many Japanese companies are coming forward in tackling environmental issues not only in Japan, but throughout the East Asian region. Furthermore, the government is expanding systems to enable more environmentally friendly business and a recycling economy that balances the environment. From the point of view of Japanese companies, conducting environmentally friendly business has changed from a social obligation to a possible business opportunity. In a Ministry of the Environment (MOE) survey of environmentally friendly activities in the fiscal year ending 2005, the ratio of companies that still considered environmental management a form of social contribution was 38%, down from earlier surveys, while many more companies than before considered such activities a key business strategy. In 2006, the MOE conducted another survey in which a poll of 3,000 companies

nationwide revealed that 70% are cutting costs through energy and waste reduction as part of plans to be certified under the International Organization for Standardization's ISO 14011 environmental management system standard. Among the 90,000 ISO 14001 certifications issued worldwide in 2004 by the International Standards Organization (ISO), Japan had the largest share at 20%.
Figure 24:
Carbon dioxide emissions in Japan, 200213
1280 1260 1240
Metric tons, million
1220 1200 1180 1160 1140 1120 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Year
Source: Datamonitor
DAT AMONITOR
Outlook
Japans environmental sector is presently the most lucrative environmental business location in the world. According to a survey by the Ministry of Environment, the size of the market for green energy (through fuel cells), which includes renewable energy facilities and energy conservation and management, was $8.9 billion in 2000. Due to technological development and reforms, however, the market size is predicted to increase 6.5 times by 2010, to $58 billion. By 2020, it is expected to grow even further, to 9.9 times the current size, or $88 billion. This sector has the potential to become a truly vast market. For this reason, several government agencies in Japan are undertaking initiatives aimed at technological development and expansion to enhance fuel cell development. Fuel cell technology has been used in hybrid low-pollution cars with low CO2 emissions since 2002, but future popularization of fuel cell cars will require the construction of infrastructure such as hydrogen stations, as well as the introduction of related laws. Thus, on the whole, there is a sustainable path in the Japanese environmental scenario, where the country will not only be able to implement control measures effectively, but also to make a lucrative market out of it. As well as supporting renewable energies through fuel

cells, the Japanese government has introduced the Cool Earth Innovative Technology Plan. This plan, unveiled in 2008, envisions the creation of a world-leading solar power generating system by 2030. In January 2010, Japan signed an agreement with China on measures to counter air pollution starting mid 2010, as it sees that increased photochemical smog in Japan may be partly caused by cross-border pollution from China. The government plans to offer technological expertise in tackling air pollution to China to put together a new five-year plan (201015) to reduce nitrogen oxide emissions that cause air pollution. The government has earmarked JPY18 million ($193,292) in the government's fiscal 2010 budget plan for the research and studies to tackle the pressing problem.

APPENDIX
APPENDIX Ask the analyst

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COUNTRY ANALYSIS REPORT

Japan: Country Analysis Report In-depth PESTLE Insights

Published 05/2010 Page 1

Japan: Country Analysis Report In-depth PESTLE Insights

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Japan: Country Analysis Report In-depth PESTLE Insights

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Japan key fundamentals

Japan: Country Analysis Report In-depth PESTLE Insights

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Japan: Country Analysis Report In-depth PESTLE Insights

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Japan: Country Analysis Report In-depth PESTLE Insights

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Japan: Country Analysis Report In-depth PESTLE Insights

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Japan: Country Analysis Report In-depth PESTLE Insights

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Key facts and geographic location

KEY FACTS AND GEOGRAPHIC LOCATION Key facts

Japan - key facts

Country and capital Full name Capital city Japan Tokyo

GDP per capita (PPP)

Ethnic composition (2000 data)

Japanese 98.5% Others 1.5%

Major religion (2001 census)

Buddhism and Shintoism 84%, Christianity 1% and Other 15%

Transport equipment, motor vehicles, semi-conductors, and chemicals

Raw materials, fuels, food stuffs, textiles, and machinery

Japan: Country Analysis Report In-depth PESTLE Insights

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Key facts and geographic location

Source: CIA The World Factbook

Japan: Country Analysis Report In-depth PESTLE Insights

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PESTLE ANALYSIS Summary

Japan: Country Analysis Report In-depth PESTLE Insights

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Analysis of Japans Political landscape

Current challenges Political change hampering relations with the US

Current strengths Strong democratic setup

High ranking on government effectiveness

Japan: Country Analysis Report In-depth PESTLE Insights

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Current challenges Political change hampering relations with the US

Future prospects Government Revitalization Unit

Japan: Country Analysis Report In-depth PESTLE Insights

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Future risks Deteriorating relations with North Korea

Japan: Country Analysis Report In-depth PESTLE Insights

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Analysis of Japans economy

Current challenges Worsening economic indicators Deflation Rising unemployment

Future prospects Growing foreign exchange reserves Current account surplus

Current strengths High per capita GDP

Japan: Country Analysis Report In-depth PESTLE Insights

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Well developed manufacturing and financial services industry

Current challenges Worsening economic indicators

Japan: Country Analysis Report In-depth PESTLE Insights

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Future prospects Growing foreign exchange reserves

Current account surplus