13 March 2017
Japan: Market Profile
Major Economic Indicators
- The Japanese economy expanded by 0.5% in 2016, same as in 2015, and is expected to maintain similar growth of 0.6% in 2017.
- The Bank of Japan (BOJ) adopted in January 2016 a negative interest rate policy on top of quantitative and qualitative easing (QQE), with the policy expected to persist in 2017.
- Japan’s consumer price inflation fell marginally by 0.1% in 2016 amid sluggish domestic demand. The unemployment rate improved to 3.1% in 2016 from 3.4% in 2015.
- Japan’s exports increased by 3.1% to US$645 billion in 2016, with imports plunging by 6.5% to US$606 billion, resulting in a trade surplus of about US$39 billion.
- Japan is Hong Kong’s third largest export market and fourth largest source of imports. In 2016, exports to Japan dropped 4.9% to US$15 billion and imports from Japan fell 5.2% to US$31.6 billion.
- Hong Kong is the largest export destination for Japanese foodstuff. In 2016, Japan’s exports of foodstuff to Hong Kong amounted to US$1.2 billion, accounting for 25.9% of Japan’s exports under such category.
Current Economic Situation
Japan is the world’s third largest economy, and its service sector contributes over 70% of the country’s GDP, with wholesale and retail trade, real estate services, and professional, scientific and technical activities as the major service pillars. With the declining importance of agricultural and mining sectors, which contribute collectively less than 1% of GDP, the manufacturing and construction sector accounts for the rest of GDP. Transport equipment, food and beverages are the major manufacturing industries of Japan.
The Japanese economy expanded by 0.5% in 2016, just as in 2015. The sluggish economic performance was largely due to poor consumer spending as a continual spillover of the sales tax increase from 5% to 8% in April 2014 and the slowdown in exports amid a subdued global economy and a stronger Japanese yen during Brexit and the US presidential elections.
In the quarterly Tankan survey released by the Bank of Japan (BOJ) in December 2016, the diffusion index for large manufacturers stood at 10, up 4 points from September 2016 (with a positive reading showing more optimistic manufacturers than pessimistic ones). The overall tone remained constructive among all enterprises.
Japan’s exports increased by 3.1% to US$645 billion in 2016, with the increase in US dollar terms reflecting the sharp yen appreciation (a yearly average of about 10%) despite a tumble in exports in yen terms. Over the same period, imports plunged by 6.5% to US$606 billion, and this led to a trade surplus of about US$39 billion. The US was Japan’s largest export market in that year, recording a fall of 7.1% from 2015. Exports to China, Japan’s second largest export market, recorded a yearly decrease of 6.5% in 2016.
Japan’s consumer price inflation eased marginally by 0.1% in 2016, while the unemployment rate improved to 3.1% from 3.4% in 2015.
Retail sales increased marginally by 0.6% in 2016 after expanding by 0.4% in 2015. Yet, household expenditure posted a drop of 0.3% year-on-year (YoY) in December 2016, recording the 10th consecutive fall and reflecting weak domestic demand. Owing to sluggish economic growth, the Japanese government has announced to further postpone the second stage of consumption tax hike to 2019.
Inbound tourism has been one of the bright spots for the Japanese economy in recent years, supporting local retailers, hotels and restaurants. In 2016, total visitor arrivals reached 24 million, a strong yearly growth of 21.8% on the heels of the impressive growth of 47.1% in 2015. Over 6 million inbound tourists in 2016 came from the Chinese mainland, an increase of 27.6% from the previous year. This was followed by tourists from Korea (5.1 million), Taiwan (4.2 million) and Hong Kong (1.8 million). The US was the fifth largest source, advancing 20.3% to 1.2 million in 2016.
Since 2012, Japan’s government has adopted a “three arrows” strategy to reinvigorate the Japanese economy. The so-called “Abenomics” comprises expansionary monetary policy, flexible fiscal policy and structural reform. The 2020 Tokyo Olympics is considered the “fourth arrow” of Abenomics.
In view of sluggish domestic demand and a challenging external environment, the BOJ surprisingly adopted in January 2016 a negative interest rate policy on top of quantitative and qualitative easing (QQE). In August 2016, Japan’s government announced a massive fiscal stimulus package of US$276 billion, including spending on infrastructure projects, low-cost loans, and cash subsidies for the poor.
To further develop inbound tourism and tap the potential of the 2020 Tokyo Olympics, the parliament passed the bill to legalise casino gambling in Japan in December 2016.
Trade Policy and Development
Most goods can be freely imported without import licences, except certain items covered by the Import Restriction System (e.g. chemical products and weapons). Most of Hong Kong’s exports to Japan, such as garments, toys, jewellery, housewares, watches, clocks and the majority of electronic items are not subject to import restrictions.
Japan's tariff schedule has five columns of applicable rates: General, WTO, Generalised System of Preferences (GSP), LDC and Temporary. Goods originating from Hong Kong are charged at WTO rates unless a lesser "Temporary" rate exists. Japan's GSP grants lower or duty-free rates to products imported from developing countries. However, Hong Kong fully graduated from Japan's GSP in February 2000.
In October 2015, the Trans-Pacific Partnership (TPP) agreement was concluded with Japan among the 12 Pacific-Rim signatory countries, covering some 40% of the global economy. However, the TPP, not yet ratified in Japan, is now in jeopardy as President Trump announced to pull the US out of the TPP. In response, Japan is now pursuing a bilateral trade agreement with the US.
As of end-December 2016, Japan had concluded 15 free trade agreements (FTA) and economic partnership agreements (EPA), including those with Singapore, Mexico, Malaysia, Chile, Thailand, Indonesia, Brunei, the Philippines, Switzerland, Vietnam, India, Peru, Australia, Mongolia. Its comprehensive economic partnership with ASEAN went into force in 2008.
Beside, Japan has embarked on bilateral FTA negotiations with eight other economies, including Canada, Colombia, Korea, the EU, and the Gulf Cooperation Council (GCC), and on regional FTA talks including TPP, Regional Comprehensive Economic Partnership (RCEP) and trilateral FTA among Japan, China and Korea.
Hong Kong and Japan signed a double taxation treaty in 2010, which was last updated in 2014.
Hong Kong's Trade with Japan
Japan is Hong Kong’s third largest export market. In 2016, Hong Kong’s exports to Japan fell by 4.9% to US$15 billion. Major export items included telecom equipment & parts (18.5% share), computers (7%), toys, games & sporting goods (6%), semi-conductors, electronic valves & tubes, etc. (5.9%) and watches and clocks (5%).
Japan is also Hong Kong's fourth largest source of imports. Hong Kong's imports from Japan fell 6.6% to US$31.6 billion in 2016. Major import items included semi-conductors, electronic valves & tubes (22.2% share), telecom equipment & parts (12.1%), electrical apparatus for electrical circuits (6.2%), electrical machinery & apparatus (5.5%) and office machines (3.9%).
Hong Kong is the largest export destination for Japanese foodstuff. In 2016, Japan’s exports of food and live animals to Hong Kong amounted to US$1.2 billion, accounting for over 25.9% of Japan’s exports under such category.
Japan's Involvement in the Hong Kong Economy
Japanese companies have a substantial involvement in the Hong Kong economy. In particular, many Japanese companies are using Hong Kong as their regional headquarters (RHQs) or regional offices (ROs) to oversee their business activities in other Asian economies, in particular, the Chinese mainland. As at 2016, there were 239 Japanese companies with RHQs in Hong Kong, while another 420 had ROs here. Japanese banks are also well represented here, including Bank of Tokyo-Mitsubishi UFJ and Sumitomo-Mitsui Bank.
Japan was the ninth largest source of foreign direct investment (FDI) in Hong Kong with a total stock of HK$225.8 billion as at end-2015, trailing British Virgin Islands, the Chinese mainland, Cayman Islands, the Netherlands, Bermuda, Singapore, the US and the UK.
In light of Hong Kong's position as a regional trade centre, most leading Japanese trading companies and manufacturers, including Itochu, Marubeni, Mitsubishi Electronic, Sojitz, Bandai and Citizen have set up purchasing/distribution offices in Hong Kong. A number of chained retailers and food and beverage companies, such as Muji, Aeon, Uniqlo, A-1 Bakery and Saizeriya Italian Restaurant operate in Hong Kong.