90 ‘Keiki’ – Japan’s Economic Climate Indicator
The Japanese term ‘keiki’ describes the level of economic activity. A ‘good keiki’ represents a positive economic cycle: goods and services sell well, companies generate higher profits, employees receive better wages, increased consumption occurs, and sales improve further. Conversely, ‘bad keiki’ indicates the opposite cycle, where economic activities stagnate and lose momentum.
The economy undergoes alternating periods of expansion (growth) and contraction (decline), known in Japanese as the Keiki Cycle, Keiki Fluctuation, or Keiki Wave. Several theories explain this cyclical pattern, with the most prominent linking it to fluctuations in corporate inventory levels (not stock prices). The cycle works as follows: When goods sell well, companies increase production, leading to inventory buildup. However, if demand falls below expectations, firms cut back production. This reduces profits for suppliers of raw materials and components, creating a ripple effect across industries. As production stagnates, the economy enters recession. This inventory-driven cycle is internationally recognized as the Kitchin Cycle, named after economist Joseph Kitchin, who first theorized it in 1923.
Japan’s economic recovery began in February 2002, marking the start of a 73-month expansion period – the longest continuous growth recorded since World War II. (Officially designated in July 2022, the Cabinet Office confirmed May 2020 as the cyclical trough.) According to the Cabinet Office’s August 2024 monthly economic report, the domestic economic climate (keiki) is currently “showing slow recovery with some areas of stagnation.” However, the future economic outlook remains uncertain.
91 GDP
The total value added (calculated by subtracting intermediate inputs such as material costs from the production value of goods and services) produced within a country during a specific period is called GDP (Gross Domestic Product). A sustained increase in GDP is comparable to a company’s year-over-year profit growth. The economic growth rate, which measures the percentage change in GDP from the previous year, is one of the most important indicators for assessing economic conditions.
Even when an economy shows no real improvement in production or services, a 5% rise in commodity prices can artificially inflate Nominal GDP by 5%. To eliminate this distortion, economists adjust GDP for price fluctuations—resulting in Real GDP.
During Japan’s high economic growth period (1955-1973), the economy achieved an average annual growth rate of approximately 10%. In recent decades, however, growth rates have declined significantly. Japan maintained its position as the world’s second-largest economy (after the United States) until 2009, when it was overtaken by China, falling to third place. In 2023, Germany surpassed Japan, relegating it to fourth position globally. According to the Annual Report on National Accounts released by Japan’s Cabinet Office in December 2023, the country’s nominal GDP per capita stood at $34,064 – the lowest among G7 nations. While the weak yen significantly impacted this figure, it also reflects Japan’s prolonged economic stagnation.
92 Inflation/Deflation
The general price level across the entire economy is referred to as ‘Bukka’ (prices), which is distinct from the prices of individual goods and services. A sustained increase in Bukka is called Inflation, while a decrease is termed Deflation.
When economic activity increases, Bukka (the general price level) tends to rise because higher demand drives up the prices of goods and services. Conversely, when economic activity slows, Bukka decreases. Since Bukka closely reflects the level of economic activity, it is often called the ‘thermometer of the economy.’
The most widely used economic indicator for price levels is the ‘Consumer Price Index (CPI)’. Published monthly by Japan’s Ministry of Internal Affairs and Communications (MIC), it measures percentage changes in the average price of goods and services for daily life, using a base year for comparison.
Japan had experienced deflation for a long time, but in April 2022, the rate of price increase rose sharply to 2.1 percent from 0.8 percent the previous month, driven by surging energy and raw material prices caused by the Russian invasion of Ukraine. After that, inflation continued, reaching a peak of 4.3 percent in January 2023. In the second half of 2023, it declined to around 3 percent, and then to around 2 percent. In the first half of 2024, it fluctuated within the 2 percent range, maintaining the rate of price increase targeted by the Bank of Japan
93 The Bank of Japan’s Monetary Policy
A bank like the Bank of Japan (BOJ), which plays a central role in a nation’s monetary system, is called a central bank. The BOJ’s responsibilities include implementing monetary policies to stabilize prices and regulate economic conditions. One of its key tools is open market operations, where it adjusts the money supply by buying or selling government bonds and other securities in the financial market, including transactions with private financial institutions.
Japan entered a prolonged period of economic stagnation following the burst of the Bubble Economy in the 1990s. In 1999, the Bank of Japan implemented the “Zero Interest Rate Policy,” effectively reducing interest rates to near zero. In 2013, the BOJ introduced “Quantitative and Qualitative Monetary Easing” to combat deflation by increasing the money supply in the open market and expanding both the types and amounts of assets purchased from the financial market.
Then, in February 2016, the Bank of Japan implemented a “Negative Interest Rate Policy,” lowering the interest rate below zero on deposits that private banks hold at the BOJ. This policy effectively imposed a fee on financial institutions for holding excess reserves beyond a certain threshold. Later, in September of the same year, the BOJ introduced a policy to guide long-term interest rates toward zero, while maintaining the negative interest rate policy on short-term rates.
In 2020, the Bank of Japan announced its commitment to persist with its monetary easing policy. In March 2023, economist Kazuo Ueda succeeded Haruhiko Kuroda as Governor, ending Kuroda’s tenure that had begun in 2013.In March 2024, the Bank of Japan’s Monetary Policy Meeting decided to end its monetary easing policy and raised the policy interest rate to 0.1 percent. While continuing the purchase of government bonds, the BOJ terminated its Yield Curve Control framework and ended its purchases of Exchange-Traded Funds (ETFs). Furthermore, in July, the BOJ raised the interest rate again, this time to 0.25 percent.
94 Government Bonds
Government bonds are debt securities issued by a government to raise capital. They are categorized based on their purpose, including:
- Deficit Bonds: Issued to cover shortfalls in the national budget for a given fiscal year.
- Construction Bonds: Issued to finance public infrastructure projects such as roads, ports, and other civil works.
Japanese national finances have been in critical deficit for a long time. In the FY2024 budget, tax revenue—which should have constituted the majority of the total ¥112 trillion revenue—accounted for only 60% (¥69 trillion). Consequently, the government issued bonds to cover the revenue shortfall. The bond dependency ratio in the FY2024 budget reached approximately 30%.
The term “national debt” refers to the total outstanding debt, including government bonds, borrowings, and government short-term securities. According to data released by the Ministry of Finance in August 2024, Japan’s national debt reached a record high of 1,311.42 trillion yen. The accumulated amount of outstanding bonds continues to rise.
Since FY2023, companies recovering from the COVID-19 pandemic have shown strong performances, leading to an increase in corporate tax revenue. Consumption tax revenue has also risen due to sharp price increases. However, government spending continues to grow, further expanding the accumulated national debt.
95 Trade
Japan ranks fourth in global trade, following China, the United States, and Germany. The total trade volume (the combined value of exports and imports) has reached approximately 211 trillion yen, according to trade statistics from the Ministry of Finance.
Japan’s trade structure has been undergoing change. In the past, Japan achieved economic growth through ‘processing trade’—importing raw materials, processing them, and exporting the finished products. Recently, however, processed goods account for about half of Japan’s imports. Japan’s main trading partners are Asian countries, with China as its largest trading partner.
Today, Japan’s main export items are automobiles, auto parts, steel, and electronic components such as semiconductors. A large share of automobiles is exported to the United States, while electronic components are mainly exported to Asian countries such as China. The primary import items are crude oil and liquefied natural gas, most of which are imported from Middle Eastern countries.For thirty years, from 1981 to 2011, Japan maintained a trade surplus, calculated by subtracting the value of imports from exports. However, in 2012, it fell into a trade deficit. In 2016, Japan returned to a surplus, but since then, surplus and deficit years have alternated without lasting trends. In 2023, Japan recorded a trade deficit of 9.213 trillion yen, marking the third consecutive year of deficit, although the figure was down 54.3 percent from the previous year. In 2022, the trade deficit reached a record high of 20.3295 trillion yen, driven by surging material prices and a weakening yen. Under the current conditions of a weak yen, concerns remain that trade deficits will persist.
96 Yen Appreciation / Yen Depreciation
The rate at which one currency is exchanged for another — for example, 1 dollar = 150 yen or 1 euro = 160 yen — is called the exchange rate. When the value of the yen increases, changing from 1 dollar = 100 yen to 1 dollar = 90 yen, this is called yen appreciation. On the other hand, when the rate moves to 1 dollar = 110 yen, it is called yen depreciation.
One of the factors that causes yen appreciation or depreciation is the movement of trade transactions. When the amount of exports from Japan to the U.S. increases, there is more demand to exchange dollars for yen, which leads to yen appreciation. On the other hand, when imports from overseas increase, it raises the demand to exchange yen for foreign currencies, leading to yen depreciation.
The movement of financial transactions in the international market also affects yen appreciation or depreciation. When foreign investors purchase Japanese stocks, they exchange their home currency for yen, leading to an increase in deposits and investments from abroad, which causes yen appreciation. Conversely, when Japanese investors increase their investments overseas, it results in more yen being exchanged for foreign currencies, causing yen depreciation.
In a yen depreciation, when the exchange rate rises from 100 yen to 110 yen per dollar, automobile makers selling a car for $10,000 in the international market receive 100,000 yen more in yen-denominated sales. This depreciation becomes a key factor driving increased sales for export-oriented companies, such as car manufacturers. On the other hand, it is a negative factor for manufacturers that rely on imported raw materials and for retailers dealing with imported goods, as their yen-denominated import costs rise.In March 2022, the Federal Reserve Board (FRB), the highest decision-making body in the U.S. central banking system, ended its policy of zero interest rates. This decision accelerated the movement of selling yen and buying dollars, driven by higher interest rates in the U.S., leading to a depreciation of the yen. In March 2024, the Bank of Japan also ended its policy of zero interest rates and, in July, announced an additional interest rate increase. However, despite these actions, the yen depreciation continued. In September, expectations that the FRB would raise interest rates further led to yen appreciation, bringing the exchange rate for the dollar down to around 140 yen.
