Why Japan

Japan’s economic strength results from a combination of technological innovation, a strong manufacturing foundation, skilled labour force, supportive government policies, and a strategic export-driven model.

High R&D investment in sectors like electronics, automotive engineering, and robotics fosters continuous innovation, which is further bolstered by management philosophies such as kaizen and just-intime production.

Recent corporate governance reform designed to revive the Japanese economy is yielding results. Capital allocation has improved and interest from foreign investors has returned. Inbound tourism, which broke new records following the country’s postpandemic re-opening, is providing a boost. Japan has also instigated significant changes to its immigration and labour force policies in a bid to overcome the challenges posed by an ageing population and shrinking workforce.

Despite these policy shifts, challenges to Japan’s economy remain. Japan’s population peaked in 2010 at 128.1 million and was an estimated 123 million in January 2025. The working age population is projected to fall by nearly 15 per cent in the next 15 years. Domestic investment has also remained low as Japanese companies have been reluctant to part with their above-average cash reserves over the past three decades.

To improve its economic foundations, Japan has become more proactive in signing free trade agreements (FTAs), opening up its domestic market to greater foreign competition. It was a driving force behind two relatively new regional agreements in the Asia-Pacific—the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership (RCEP). Japan has also increased its engagement with Southeast Asia and signed the ASEAN-Japan Comprehensive Strategic Partnership and the ASEAN-Japan Joint Vision Statement on Friendship and Cooperation in 2023. This augurs well for the economy, as evidenced by the growing gains from trade—Japan’s share of trade to GDP has grown substantially over the past two decades. Australia and Japan’s mutual interest in Southeast Asia may offer further opportunities for joint collaboration in the region. 

Japan has long-standing trade ties with Australia and is its second largest trading partner for goods after China. Japan remains Australia’s second biggest export market. Total two-way trade in goods and services was valued at AUD 113.4 billion in FY 2024. Coal, natural gas, iron ore and concentrates, beef and aluminium are Australia’s largest exports. Japan is also a major investor in Australia, with direct foreign investment (FDI) reaching a record high of AUD 141.1 billion in 2024. This equates to 11.95 % of FDI into Australia. Japan ranked third in terms of cumulative FDI into Australia, and Japan remains the only foreign investor to have increased its FDI into Australia in every single year over the past 11 years. Australia accounted for 8.3% of all Japanese FDI.

Japan and Australia are both members of the CPTPP and RCEP. Australia and Japan have bilateral economic agreements such as the Japan-Australia Economic Partnership Agreement (JAEPA) and the Australia-Japan Critical Minerals Partnership. More information is available in Section 5.1 of this report and from the Department of Foreign Affairs and Trade’s Japan Country Brief.

The current forecast is for Japan’s GDP is to fall from the 2025 figure of 1.1 per cent to 0.6 in 2026 and to 0.5 in 2030 (Figure 1). The yen’s depreciation against the USD to record lows in 2024 provides a boost to Japanese exports in the medium term. The risks to the forecast include a slowdown in global growth, which would weigh on demand for Japan’s exports, as well as continued low growth in productivity due to structural factors such as the country’s ageing population and rigidity in the country’s labour market.

Comparing key indicators: Japan and Australia

Figure 1: Real GDP Growth – Japan and world average (2016-2026f), %

Japan’s growth trajectory presents opportunities for Australian trade and investment, particularly in sectors that align with Japan’s economic development priorities and its growing consumer class. This section provides a short overview of prospective sectors.

Food and agribusiness

Japan is one of Australia’s largest export markets for food and agriculture products. In 2023-24, it ranked third behind China (1st) and the US (2nd), taking in nearly AUD 5.68 billion worth of goods. Beef (and veal) was by far Australia’s largest food and agriculture export to Japan that year, valued at AUD 1.9 billion. It was followed by canola (AUD 1 billion) and more than AUD 500 million worth of wheat. Changing lifestyles in Japan have resulted in growing demand for Australian natural cheese, grapes and macadamias. Many Australian food and agricultural exports to Japan enjoy preferential market access under the JAEPA and the CPTPP. There may also be potential for Australian firms to help the country grow its burgeoning urban and vertical farming industry. In addition to meat and cheese, Austrade has identified opportunities for Australian exports in wine, fresh fruit, packaged foods, and seafood and aquaculture.

Health and medical

Japan’s ageing population makes it one of the world’s most attractive markets for health and medical services. As of 2024, 29.7 per cent of its population was 65 years or older ,meaning almost 3 in 10 Japanese are retiree’s, a figure that is projected to rise to nearly 40 per cent by the end of the century, behind only China and South Korea. Demand for healthcare is forecast to rise accordingly. In the past, barriers to market entry were high, but they have been coming down. For example, in the wake of the pandemic, the government has proposed easing requirements for approving new drugs, particularly the requirement that clinical trials be conducted on Japanese citizens. While noting that many hurdles to market entry are still in place, Austrade has identified three sub-sectors that present opportunities for Australian exporters: biotech, digital health and health services.

Defence and security

Japan's Cabinet approved a record defense budget of ¥7.95 trillion (AUD 82 billion) for fiscal year 2024. This represents a 16.5% increase from the previous fiscal year's budget of ¥6.8 trillion (AUD 70 billion). Possibly the single biggest development in this sector ever for the Australia-Japan relationship the announcement of the Australian Government’s decision to buy the Mogami class frigate from Mitsubishi Heavy Industries as the basis for its future frigate capability. This is an incredibly important announcement for both Australia and Japan - and the bilateral relationship - and there are already signs that it is becoming a catalyst for huge interest in building bilateral cooperation in this sector. In August 2023, the Australia-Japan Reciprocal Access Agreement (RAA), came into force. The RAA, Japan’s first such agreement since 1960, contains binding and non-binding clauses to enhance cooperation on security issues in the Indo-Pacific region. This complements the Indo-Pacific diplomatic partnership between Australia, India, Japan and the US, known as The Quad. Japan is investing in dual-use technologies, which have both military as well as civilian applications, providing opportunities for Australian expertise in aerospace, quantum, hypersonics and unmanned aerial and underwater vehicles. Close defence ties between Japan and Australia open up opportunities for collaboration and greater interoperability through activities such as joint manufacturing, component sourcing and supply chain and logistics partnerships, The Australian Defence Export Office (ADEO) coordinates whole-of-government support for Australian defence exporters. Within the AEDO, Team Defence Australia oversees international promotion efforts.

Green economy

Japan has an ambitious Green Energy Transformation Plan in place. There are two key pillars to the plan: to issue AUD 206.2 billion (JPY 20 trillion) of Climate Transition Bonds, and to introduce carbon pricing.

The goal is to increase the share of non-fossil fuels in electricity generation to 59 per cent by 2030, up from 31 per cent in 2022. Priority areas are energy security and transition, electric vehicles, next-generation renewables, and buildings and housing. Japan also aims to reduce carbon emissions from its steel industry by 30 per cent by 2030. There are opportunities for Australian producers to tap into Japanese demand for green iron, green steel, critical minerals, decarbonisation technologies, consultancy services, and carbon capture and storage.

Australia’s expertise in hydrogen and renewable energy positions it as a key partner in Japan’s transition, with strong potential for investment and collaboration in green hydrogen projects. Australian businesses in solar, wind, and battery storage technologies can also play a role in supporting Japan’s ambitious energy transition goals.

Technology

Japan underperforms in many key measures of digital competitiveness despite its reputation as a technologically advanced country. It lags competitors in key areas such as talent, regulatory frameworks and business agility. The government is seeking to address these barriers by attracting more foreign talent, easing regulatory burdens, fostering more tech startups and offering incentives for FDI in digital transformation.

Green technology, next generation mobile (6G) and semiconductors are among key areas of interest. The SaaS market in Japan is tipped to grow from JPY 1.41 trillion (AUD 14.5 billion) in 2023 to JPY 2.10 trillion (AUD 21.6 billion) in 2027. Australian SaaS businesses can tap into opportunities in this growing sector as it matures. Japan’s data centre market is also booming. It is expected to reach more than JPY 4.0 trillion (AUD 41.2 billion) in 2026. Australian data centre investors and developers are already leveraging this opportunity. The burgeoning use of AI and cloud services will drive further demand for hyperscale data in Japan, creating ongoing opportunities for Australian businesses in this area.

Consumer goods

Australia enjoys a strong reputation among Japanese consumers as a supplier of safe and natural consumer products. Despite a slow start, Japan has become the second largest e-commerce market in Asia after China. Opportunities for Australian consumer goods are rising as Japanese consumers increasingly turn to e-commerce for purchases.

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