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.

The information in this report was compiled by the staff at City National Bank from data and sources believed to be reliable but City National Bank makes no representation as to the accuracy or completeness of the information. The opinions expressed, together with any estimate or projection given, constitute the judgment of the author as of the date of the report. City National Bank has no obligation to update, modify or amend this report or to otherwise notify a reader in the event any information stated, opinion expressed, matter discussed, estimate or projection changes or is determined to be inaccurate. This report is intended to be a source of general information. It is not to be construed as an offer, or solicitation of an offer, to buy or sell any financial instrument. It should not be relied upon as specific investment advice directed to the reader’s specific investment objectives. Any financial instrument discussed in this report may not be suitable for the reader. Each reader must make his or her own investment decision, using an independent advisor if prudent, based on his or her own investment objective and financial situation. Prices and availability of financial instruments are subject to change without notice. Financial instruments denominated in a foreign currency are subject to exchange rate risk in addition to the risk of the investment. City National Bank (and its clients or associated persons) may, at times, engage in transactions in a manner inconsistent with this report and, with respect to particular securities and financial instruments discussed, may buy from or sell to clients or others on a principal basis. Past performance is not necessarily an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.