Trade balanceIn the last decade, Japan managed to downsize the deficit in goods and service trade on its balance of international payments (BoP) through the country’s growing export position for physical goods. While the trade deficit on commercial services fluctuated in the last decade, merchandise remained the main position of the trade balance. Major commodities exported from Japan included durable goods such as electrical and general machinery as well as transport equipment. Taking advantage of the favorable reputation of the Japanese automotive and machinery industries in the global market as well as the location of business headquarters close to strategically convenient logistic hubs within the country, large metal and electronic corporations are contributing significantly to the export position of Japan.
Meanwhile, non-durable goods make up a significant share of the import market owing to the importance of mineral fuels to the domestic energy industry. While the country reduced its dependency on fossil fuel imports through the operation of nuclear power plants in the last decades, a lack of oil reserves and declining support for nuclear energy following the 2011 Great East Japan Earthquake impeded further efforts to become more self-sufficient.
Building on trade agreementsForeign relations are characterized by the importance of China and the United States as trade partners, with both nations being in a close race as the largest export market for Japan. At the same time, the East Asian partner is also the leading supplier within the import market. Machineries and automobile parts as well as manufactured goods are significant segments upholding domestic production processes, with many overseas supply routes being traceable to China. To broaden economic relations and diversify supply chains, Japan entered into free trade agreements with the European Union and the United Kingdom. Together with the long-running partnership with the United States, access to Western markets has been broadening, whereas gradual tariff reductions and the opening of the commercial service market symbolized progressive steps in liberalizing trade in Japan.
In recent developments, Japan along with China, South Korea, Australia, New Zealand, and the ten ASEAN member countries successfully ratified the Regional Comprehensive Economic Partnership (RCEP), a free trade agreement that took effect in January 2022. With the RCEP setting up a framework based on uniform rules and standards, cross-border transactions and the supply routes between the 15 members were expected to benefit from the partnership, while ensuring regional economic integration.
Braving the challenges of crisesEven though negotiations for free trade agreements have been gathering speed in recent decades, Japan has been impacted by internal, external, and global crises in quick successions in recent years. While recurring natural disasters are an internal challenge intensified by climate change, the global coronavirus pandemic (COVID-19) impacted Japanese industries through shortages of raw materials, interrupted supply chains, and strict border controls. Closing off borders to tourism for more than two years, the travel position, formerly one of the largest services exported from Japan, was unable to balance out the deficit of other commercial services in the balance of trade.
As the effects of the pandemic were starting to subside, Russia’s invasion of Ukraine posed a political and economic challenge to the young government body formed around Prime Minister Fumio Kishida in Japan. In response to the assault on Ukraine, the Japanese Prime Minister announced a ban on coal imports from Russia. While the domestic energy sector sources a share of mineral fuels, primarily coal and crude oil, from Russia, imports are mainly derived from Middle Eastern partners. With the country further working on decarbonization, the research into substitutes for fossil energy is growing in importance. Additionally, businesses are split between the choices of risking the nationalization of assets if they withdrew from Russia and the reputational damage from continuing operations. As Japanese companies have gradually announced their retreat from the Russian market, long-term effects were expected to result from the shrinking trade activities.