PESTEL analysis of Japan (Japan Country Profile)
This PESTEL analysis of Japan aims to address some of the political, economic, social, technological, environmental, and legal factors that affect Japan today. Japan is often called the ‘land of the rising sun’. It is a powerful country in the world.
Political environment in Japan
Japan is a constitutional monarchy with the emperor being the head of state. Like many other monarchs in the world, Japanese monarch has very limited say concerning the political affairs of the country. However, the people and the constitution of the country regard the emperor as ‘the symbol of the State and of the unity of people’. The prime minister and the cabinet have the executive power to administer the state affairs.
Tokyo is the capital of Japan. Japan has a post-war pacifist constitution. It plays a considerable role in international community and is a major aid donor (BBC, 2020). While the internal political environment is stable, Japan has some very powerful neighbours with a long history of diplomatic challenges. It has territorial disputes and political disagreements with a number of countries, notably Russia, China, South Korea, and North Korea.
Japan maintains a very close relationship with the United States. This relationship is part and parcel of Japan’s foreign and security policy. Japan has also been putting a lot of efforts to build and maintain relationship with other world powers such as India, the UK, France, and Australia. However, an effort to amend Japan’s post-war pacifist constitution has raised concerns. It is politically contentious and may impact on trade and foreign direct investment.
Economic environment in Japan
The next element to address in the PESTEL analysis of Japan is the country’s economic environment. Japan is the 3rd largest economy in the world with a total GDP of around $4.9 trillion. It is also the 2nd largest economy in Asia. It is a member of the G7, G20, APEC, and ASEAN. It has a mixed economic system, albeit the government closely works with industries. Motor vehicles, electronic equipment, machine tools, steel, ships, chemicals, textiles, and processed foods are some of the major industries in Japan. Japan has a world-renowned automobile industry and is home to some of the largest vehicle manufacturers in the world e.g. Toyota, Honda, Suzuki, Mazda, Nissan, Mitsubishi, and Yamaha.
Japan heavily relies on imports of oil, gas, coal, iron ore, copper, aluminium, wood and raw materials for industrial production. It imports most of these resources from countries such as China, the USA, South Korea, Germany, and Australia. Likewise, it exports a variety of manufactured goods e.g. electronic equipment, cars, vehicle parts, and industrial printers to other countries. Japanese exports mostly go to the USA, China, South Korea, Hong Kong, and Thailand. It is worth mentioning that many Japanese exporters are concerned about the likely impact of the recent rise in the value of the yen (Japanese currency).
Japanese companies need to pay corporate tax on the income they generate in Japan and abroad. On the other hand, foreign companies operating in Japan pay tax only on the income they generate within Japan. There are four types of corporate tax in Japan i.e. corporate tax, corporate inhabitant tax, enterprise tax, and special local corporate tax. The current corporate tax rate in Japan is 23.2%; however, the government has recently approved a plan to reduce the tax rate to 20% for companies that raise wages aggressively and boost domestic capital spending.
Social environment in Japan
Japan is ranked as the 10th most populated country in the world. However, according to some other sources, it is not 10th, rather 11th in the world. Its current population is 126.2 million (Worldometer, 2021). Shintoism and Buddhism are two major religions while the major language is Japanese which is spoken by around 99% of the country’s population.
Japan faces a number of social challenges. Ageing population and sinking birth rate are two of the biggest challenges Japan faces today. The life expectancy for men is 81 years, while 87 years for women. Many sources forecast that the Japanese population is likely to fall below 100 million in 2048 and about 87 million by 2060. This will severely impact on Japan and it will lose out to regional powers, particularly China. Therefore, many Japanese politicians are now highlighting an ‘integrated’ immigration policy to draw vital foreign workers to Japan to reduce the skill-gaps created by shrinking birth rate and ageing population.
Many people in Japan prefer Japanese companies to foreign ones. This makes trading difficult for foreign companies. Indeed, this is one of the main reasons as to why many foreign companies failed in Japan. For instance, after operating 9 years, Tesco (British retail giant) had to close its operations in Japan in 2012 (BBC, 2012). Likewise, Wendy’s, Pret A Manger’s, and many other global companies failed in Japan. However, it is also true that some foreign companies did very well in Japan as well. Therefore, it is extremely important for foreign companies to carry out a detailed environmental scanning before entering into Japan.
Technological environment in Japan
Technology is the next topic to discuss in the PESTEL analysis of Japan. Japan is one of the most technologically advanced countries in world. It has been pushing technological innovation and creativity in such a way that many countries will struggle to emulate. The Japanese are well-known as extremely creative in searching out and learning to use modern technologies.
Japan’s innovation can be found in a variety of fields. For example, automation systems are widely used in Japan, particularly in hospitals, airports, and restaurants. Likewise, Japan is well ahead of many other advanced countries in robotic development. Indeed, it has more than half of the industrial robots in the world.
The contactless payment system has been in Japan for a long time; indeed, long before many countries even thought about it. Japan has also done tremendously well in areas such as space research and development, chemicals, optics, rail transport, and semi-conductors. These developments offer great opportunities for both Japanese and foreign individuals and companies.
Environmental factors in Japan
Japan is a relatively clean and environmentally responsible nation. However, it faces some environmental challenges today. For example, waste management is one of the biggest environmental issues in Japan. Trash produced by the modern society, industrial activities, and agriculture contribute to the production of a great deal of waste. Japan is indeed under pressure to minimise waste and control environmental pollution.
Japan is one of the countries, most affected by calamities and natural disasters. Tsunamis, floods, earthquakes, mudslides, cyclones, and volcanic eruptions hit Japan from time-to-time. These disasters cost Japan billions of dollars for reforms and rebuilding. In fact, Japan is a less popular tourist destination because of natural disasters, high-cost, and language barriers.
Legal environment in Japan
Legal environment is the last element to discuss in the PESTEL analysis of Japan. People can work in Japan as employees, dispatched workers, independent contractors, and directors. All employees enjoy employment rights and benefits such as maximum work hours, work breaks, holidays, and maternity leave. Companies need to register employees for mandatory pension insurance, health insurance, unemployment insurance, and workers’ accident compensation insurance. All of these apply to employment relationships regardless of the citizenship of employees (Ohta, 2021).
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Last update: 13 January 2021
BBC (2020) Japan country profile, available at: http://www.bbc.co.uk/news/world-asia-pacific-14918801 (Accessed 12 January 2021)
Japan Times (2018) World Bank estimates Japan’s growth in 2018 at 1.3%, down from 1.7% estimate for 2017, https://www.japantimes.co.jp/news/2018/01/10/business/economy-business/world-bank-estimates-japans-growth-2018-1-3-1-7-estimate-2017/#.Ww33RzRrxdg (Accessed 28 May 2018)
Ohta, Y. (2021) Employment and employee benefits in Japan: overview, available at: https://uk.practicallaw.thomsonreuters.com/9-503-3920? (Accessed 12 January 2021)
Petroff, A. (2017) Britain crashes out of world’s top 5 economies, http://money.cnn.com/2017/11/22/news/economy/uk-france-biggest-economies-in-the-world/index.html, (Accessed 28 May 2018)
Sieg, L. & Sheldrick, A. (2015) Japan needs immigrants to boost population or could lose to China: minister, available at https://www.reuters.com/article/us-japan-immigration/japan-needs-immigrants-to-boost-population-or-could-lose-to-china-minister-idUSKBN0TT0U120151210 (Accessed 10 December 2017)
Worldometer (2021) Japan population, available at: https://www.worldometers.info/world-population/japan-population/ (accessed 12 January 2021)
Photo credit: Sarkar office Japan
Author: M Rahman
M Rahman writes extensively online and offline with an emphasis on business management, marketing, and tourism. He is a lecturer in Management and Marketing. He holds an MSc in Tourism & Hospitality from the University of Sunderland. Also, graduated from Leeds Metropolitan University with a BA in Business & Management Studies and completed a DTLLS (Diploma in Teaching in the Life-Long Learning Sector) from London South Bank University.