Japan's economy produced $5.4 trillion in 2017, as measured by purchasing power parity. That makes it the world's fifth largest economy after China, the European Union, the United States, and India. But it's not on pace to catch up, because it only grew 1.5 percent.

Japan has 27 million people. Its gross domestic product per capita is $42,700 or 41st in the world. Its standard of living is lower than the United States or the EU, but higher than China or South Korea. 

Japan has a mixed economy based on capitalism, although its government works closely with industry. In fact, central bank spending equals 18 percent of the country's gross domestic product. It accounts for almost all of government borrowing. 

Japan's largest exports are automobiles and parts, steel products, and semiconductors. As the world moves toward electric vehicles to combat climate change, it will hurt Japan's economy. Electric vehicles use one-third fewer parts than in gas-powered vehicles. Japan’s government wants manufacturers to stop building conventional cars by 2050. China, the world’s biggest car market, already has a goal of 1 in 5 vehicles running on batteries by 2025.

Japan's main imports are oil and liquid natural gas. It is trying to reduce these imports by increasing its use of renewable energy. It is also restarting nuclear plants that were shut down after the Fukushima nuclear disaster.

Abenomics
On December 26, 2012, Shinzo Abe became Japan's Prime Minister for the second time. His first term was from 2006 to 2007. He won in 2012 by promising economic reform to shake the country out of its 20-year slump.

"Abenomics" has three principal components, called the "three arrows."

First, Abe instructed the Bank of Japan to initiate expansive monetary policiesthrough quantitative easing. That lowered the value of the yen from $.013 in 2012 to $.0083 by May 2013. That's expressed in terms of the value of the dollar, which rose from 76.88 yen to 120.18 yen. 

Making the yen cheaper should have increased exports. Their prices drop in dollar terms, making them more competitively priced. But Japanese companies didn't increase exports as expected. Some companies didn't lower their foreign prices. They pocketed the profits instead. Others had already outsourced factories to lower-cost areas, so the devaluation didn't help. Still others weren't helped because they had moved production into their markets, such as Toyota to the United States.

The devaluation hurt Japanese businesses reliant on imports. Their costs rose. It also hurt consumers, who had to pay more for imports.

Japan's Lost Decade

In January 1990, Japan's stock market crashed. Property values fell 87 percent. The Bank of Japan fought back. It lowered the interest rate from 6 percent to 0.5 percent by 1995. It didn't revive the economy because people had borrowed too much to buy real estate during the bubble. They took advantage of low rates to refinance old debt. They didn't borrow to buy more.  



The government tried fiscal policy. It spent on highways and other infrastructure. That created the high debt-to-GDP ratio.



By 2005, companies had repaired their balance sheets. In 2007, Japan's economy started to improve. It was up 2.1 percent in 2007 and 3.2 percent in Q1 2008. This led many to believe it had finally grown out of its 20-year slump.



The 2008 financial crisis sent GDP growth plummeting 12.9 percent in the fourth quarter. It was the worst decline since the 1974 recession. Japan's economic collapse was a shock, since Q3 growth was only down 0.1 percent, following a decrease of 2.4 percent in Q2 2008. The severe downturn was a result of slumping exports in consumer electronics and auto sales. That sector was 16 percent of Japan's economy. It had been a driving force behinds the country's economic revival from 2002 to 2008.



Earthquake, Tsunami and Fukushima Disaster Impact

On March 11, 2011, Japan suffered a 9.0 magnitude earthquake. It created a 100-foot tsunami that flooded the Fukushima nuclear power plant disaster. It occurred just as Japan's economy was emerging from the Great Recession. In 2010, GDP increased by a healthy 3 percent. That was the fastest growth in 20 years.



Japan lost much of its electricity generation when it shut down almost all its nuclear power plants after the earthquake. The economy shrank 0.5 percent in 2011 as manufacturing slowed due to the crisis.



Japan adopted more stringent regulations, under which it is reactivating at least 30 reactors that pass. Its energy plan is to have 22 percent nuclear, 24 percent renewables, and 26 percent coal by 2030.



How It Affects the U.S. Economy

On July 17, 2018, the EU signed a trade agreement with Japan. It reduces or ends tariffs on almost all goods. It's the world's largest bilateral trade agreement, covering $152 billion in goods. It will come into force in 2019 after ratification. The deal will hurt U.S. auto and agricultural exporters.



The Bank of Japan had been the largest foreign holder of U.S. debt until China replaced it in 2008. Both Japan and China do this to control the value of their currencies relative to the dollar. They must keep their exports competitively priced. But this strategy drove Japan's debt to 182 percent of total GDP output even before Abenomics. 


A low yen made Japan's auto industry very competitive. That was one reason that Toyota became the No. 1 automaker in the world in 2007. But if Japan's central bank decides that a low yen isn't boosting growth and oil prices rise, then it may let the yen strengthen to reduce inflation. It would purchase fewer Treasury bonds. That would allow yields to rise and boost U.S. interest rates.

https://www.thebalance.com/japan-s-economy-recession-effect-on-u-s-and-world-3306007