The Japanese economy, as with many others, continues to struggle with growth after the Great Recession. It was not always this way for Japan. Post World War II Japan’s growth rate boomed, averaging 9.25% through 1970, generating jobs and huge trade surpluses. This growth downgraded in the 1980s to no more than 4% due to a sharp increase in oil prices. And in the early 1990s a stock market crash and property bubble burst took their combined toll upon the economy, causing a deflationary spiral and anemic growth for the next 20 plus years.
After the burst of the bubble, many of Japan’s Prime Ministers’ tenures lasted only a few months until the election of Prime Minister Shinzo Abe, who started a second term in December 2012. At that time he launched his economic policies known as Abenomics, a three-prong approach of monetary easing, fiscal stimulus, and structural reforms, designed to jolt the economy back to life.
Abenomics had some very positive immediate effects on various sectors of the Japanese economy. Within six months of Abe’s election the Japanese yen had weakened by almost 25%, increasing exports, and the Nikkei stock index climbed by almost 50%, boosting morale. But unfortunately the real economy never reacted in the same positive manner, growing by just 1.6% in 2013, before flattening in 2014. Strong deflationary trends and enormous public debt issues, combined with a sales tax increase have conspired to keep consumer spending in the doldrums.
Where does Japan go from here? Despite this lackluster performance, Prime Minister Abe is still quite popular. His party won a landslide victory in December, so most of his major economic and fiscal initiatives will remain on track.
Our View: Despite the weaker Japanese yen, the country still has a very large trade deficit, primarily due to increased oil imports since the Fukushima nuclear disaster. In fact, Japan has been running a trade deficit for about four years. With that still in place, together with ongoing monetary easing by the Bank of Japan, we continue to look for a weaker yen in the months ahead.
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