May 5, 2025
Understanding Japan’s Evolving Economic Landscape
In 2024, the world watched as Germany overtook Japan as the third-largest economy, a shift widely attributed to the yen’s depreciation. That, however, would prove to be just the beginning of a series of economic repositioning. Economists fixed their sight on the Japanese nation once again amid news this month that California surpassed it as the world’s fourth-largest economy, recording a marginally higher gross domestic product (GDP) than its Asian counterpart last year. These developments, while unexpected, underscore the shifting nature of economies across the globe.
At the outset of the year, the International Monetary Fund (IMF) projected in its World Economic Outlook that the Japanese economy would grow by 1.1% in 2025, marking a return to pre-pandemic levels. Experts agreed on the drivers of Japan’s economic outlook: personal consumption and corporate investment are on the rise. Japanese firms have become increasingly proactive too, and with abundant cash reserves and low valuations, the market will likely remain dynamic. Then unprecedented tariffs convulsed the global economy, leaving few countries, if any, unaffected in their wake. Just days ago, the Bank of Japan halved the country’s growth outlook, projecting instead that Japan’s GDP would grow by 0.5%. Unsurprisingly, the reduction was said to be based on questions and uncertainties surrounding the on-again, off-again trade war and other, unpredictable changes to economic policy.
The East Asian nation is now at a pivotal moment. Economists and investors, though cautious, are still looking at the Japanese market with optimism as it positions itself to benefit from wage increases, corporate investment, personal consumption, and technological advancements. But growth in this new year could be tempered, as we have already seen, by global economic uncertainties, political instability, an aging population, and high public debt. Japan’s evolving economic landscape presents challenges, to be sure, but a host of business opportunities to capitalize on remain within reach.
Leadership in Tokyo predicts personal consumption, which accounts for nearly half of Japanese economic activity, The reason? Amid negotiations with the Japanese Trade Union Confederation (Rengō) last month, Japanese firms agreed to boost salaries by 5.46% this year, well above last year’s remarkable 5.10% rise — the first hike of more than 5% in over three decades. The surge in wages follows a combination of labor shortage and annual wage negotiations between management and unions in Japan. If this trend continues, it will likely only further fuel Japan’s economy.
Mergers and Acquisitions: Expanding Your Reach in Japan’s Dynamic Market
The M&A activity across Japan saw a significant uptick in volume in 2024 and more is expected in 2025. The Japan Times reported more than USD 230 billion in deals in 2024, attributing this to the changing attitudes of Japanese businesses towards expansion inside and outside of Japan. This growth in investment looks set to continue as companies look at shifting market conditions, new opportunities, and tackling threats from new players. This valuation, which comes after years of stagnation, represents an increase of 44% — the fastest growth since 2018 — a number that exceeds M&A activity across the broader Asia-Pacific (APAC) region. Notably, 2024 was the busiest year for Japan-related M&A since 1985, according to Nikkei Asia, which reported that there were more than 4,700 announced M&A deals involving a Japanese buyer or seller.
Private Equity funds have been quick to adopt Japan as a poster child of opportunities as companies look to boost efficiency and raise capital, while investment banks both domestic and international have seen increased earnings from fees for M&A deals and the growth of M&A teams within large banks, including JPMorgan and Daiwa Securities.
Many of these transactions have made headlines globally as deals elsewhere have slowed. Examples of some significant M&A deals or bids in 2024 include:
- Alimentation Couche-Tard Inc.’s USD 58 billion bid for Japanese 7-Eleven owner Seven & I Holdings Limited
- Nippon Life Insurance’s USD 8.2 billion acquisition of U.S. insurer Resolution Life
- Blackstone’s USD 1.74 billion tender offer to take Japanese digital comic distributor Infocom private
We have already witnessed several deals in 2025, such as KKR’s aggressive bid for control of Fuji Soft, and market watchers expect more to come. Although domestic M&A continues to be a driving economic force, cross-border deals are becoming ever enticing.
In the same vein, Japanese businesses are so keen to invest in these acquisitions that they have even taken the unusual step of trying to sue U.S. officials who block certain transactions. Take, for example, the agreement for Nippon Steel to acquire U.S. Steel. While the merger was blocked by the previous U.S. administration, President Donald Trump and Japanese Prime Minister Shigeru Ishiba agreed to revive it, albeit in the form of an investment, demonstrating the willingness of Japanese businesses and their government to pivot quickly to take advantage of changing market conditions.
Challenges and Considerations for Japan’s Business Ventures
The APAC region will likely see slowing economic growth over the next few years due to the increasingly turbulent geopolitical situation, perceived threats of tariffs from the Trump administration, trade-related tensions, fallout from the slowing Chinese economy and an aging population in Japan. These threats, including increased defense spending, will put pressure on the Japanese government coffers and those of other Asian economies, according to a November 2024 report released by Asia-Pacific Economic Cooperation (APEC).
The Economist Intelligence Unit (EIU) also observed that “Asia faces a fragile consumer rebound, rising geopolitical tensions, and the evolving impact of U.S. trade polices under Donald Trump. With semiconductor exports strengthening key economies, the region faces a complex mix of risks and opportunities, which could significantly affect operations and strategic decision-making.”
And yet Japan, a stable market with an improving relationship with the White House, is in an excellent position to thrive in the current conditions. Japanese businesses are keen to explore markets beyond their national boundaries, aggressively pursuing opportunities overseas. Japanese Banks and Private Equity, too, are actively looking for investment opportunities across Asia and beyond, especially in technology.
Geopolitical Challenges: Assessing the Impact on Japan’s Business Opportunities
The Trump administration has contributed to global economic uncertainties, imposing then halting tariffs on imports from countries across the globe, including Mexico, Canada, China, and even Japan, with looming threats to add individualized tariffs on nations that target American firms. Although Japan, by virtue of its longstanding relationship with the U.S., may be able to better navigate evolving geopolitical challenges.
In early February, Japanese Prime Minister Shigeru Ishiba met with U.S. President Donald Trump in the two leaders’ first face-to-face talks in Washington. During the meeting, the Japanese prime minister endeavored to build ties and minimize or, in the best-case scenario, avoid friction as many nations and their trade relations with the U.S. have fallen into President Trump’s crosshairs. At the time, Prime Minister Ishiba was “largely successful” on this front, according to media reporting, with the two leaders pledging to pursue a “new golden age” of U.S.-Japanese relations.
Still, the Trump administration pressed Japan to slash the U.S. trade deficit with Japan to zero, warning of potential tariffs if it failed to do so. In 2024, the U.S.’ trade deficit in goods with Japan was recorded at USD 68.5 billion, according to Census data, down approximately USD 3 billion from the prior year. Prime Minister Ishiba, following in the footsteps of his predecessor, the late Shinzo Abe — who maintained a strong relationship with President Trump and was able to leverage their friendship to advocate for various Japanese interests — agreed, stating, “I think we’ll be able to [cut the two countries’ trade deficit] pretty easily.”
Looking to further preempt any controversy over trade, Prime Minister Ishiba emphasized during a joint news conference after his meeting with President Trump that Tokyo has been the largest foreign direct investor in the U.S. for five consecutive years, with the Prime Minister conveying a willingness to cooperate to raise Japanese investment to an “unprecedented” USD 1 trillion.
However, in a bewildering move following the talks, the U.S. proceeded to impose a 24% tariff on products imported from Japan, then paused implementation of the duty until early July. It is unclear at this time whether the tariffs will be reimposed or adjusted. What is clear is this: President Trump chose Japan for its first face-to-face talks, held earlier this month, to negotiate for a possible reprieve from the potentially devastating tariffs. If anything, this may be a signpost that the U.S. does still value the relationship its forged with its East Asian ally.
Identifying the Hotspots: Key Sectors
Although historical challenges and unexpected geopolitical circumstances will force investors and economists to take some risks, a few industries have emerged as sure bets. The technology sector, particularly high-tech industries, is expected to be a key driver for overall growth in the country. Late last year, Tokyo entered a multibillion-dollar industrial policy aimed at revivifying its lagging economy. As part of the initiative, Japan will work with technology leaders in the U.S. and other countries to focus on advanced forms of technology such as batteries and solar panels, with the goal to ultimately recoup a larger share of the global semiconductor industry, a sector that the International Data Corporation expects will grow by 15% in 2025.
One way or another, this year will be a formative one for the Japanese economy. New opportunities, likely to be coupled with risk, may just be the new spring Tokyo and investors have been hoping for. Only time will tell.