Country Risk Analysis of

Japan
• The Country Risk Tier (CRT) reflects Best’s
assessment of three categories of risk: Economic,
Political, and Financial System Risk.
• As a CRT-2 country, Japan has very low levels of
economic risk, and low levels of political and financial
system risk. Growth is projected to remain under 1%
over the medium term. Issues hindering growth are
mostly chronic and structural, including an aging
population and a high level of government debt.
Consumer spending is expected to decline later this year,
as the government implements a planned consumer tax.
• Inflation remains low but is expected to remain
positive over the short term.

Economic Risk: Very Low

• The Japanese economy is dominated by the
automotive industry, industrial machinery, and
construction sectors,
• Its geographic location makes Japan vulnerable to
earthquakes and tsunami. Given the scarcity of critical
natural resources, the country was significantly impacted
by the 2011 meltdown at the Fukushima Nuclear Power
Plant. Fallout from the disaster affected Japan’s energy
self-sufficiency rate, which has been under 10%.
• Unemployment remains at record lows, close to
2.3%. Japan’s population is aging rapidly, constraining
the size of its workforce, although increased participation
among women and older workers is temporarily
mitigating some of the effects of this demographic shift.
The country has one of the lowest percentages of foreign
workers among OECD countries, which further constrains
its labor pool.
Political Risk: Low
•The Japanese government is democratic and relatively
stable. Serving his third term, Prime Minister Shinzo Abe
has orchestrated an economic recovery for the country,
although long-term structural issues remain.
•Although Prime Minister Abe’s Liberal Democratic Party
(LDP) has a majority in the legislature, it failed to win a
super majority in the July 2019 elections. Abe had
indicated his intention to amend Japan’s pacifist
Constitution if the LDP had won a two-thirds majority.
•Business operations are costly due to heavy
government regulation. The business environment is
somewhat closed; cooperation between the government
and some industries makes it difficult for start-up
companies to enter the market.
•The judiciary in Japan is highly independent and
advanced. Law enforcement is consistent, but judicial
processes can be inefficient and certain regulations lack
transparency.

Financial System Risk: Low

•The Financial Services Agency (FSA) regulates the
banking and insurance industries.
•Japan’s tax system is transparent and well developed.
Under Prime Minister Abe, corporate tax rates have
been lowered, to enhance the country’s competitiveness.
An increase in the consumption tax from 8% to 10% is
planned in fall 2019.
•The financial system is stable, but profitability is low. As
a result of the aging population, the banks’ role in the
economy is likely to decrease in importance due to
weakening credit demand.
•Growth has been persistently weak and the country
faces stagnation. Despite the central bank’s negative
interest rates, inflation remains below target.