Despite four years of economic stimulus, Japan’s economy remains only 2.2 per cent bigger in real terms than when Prime Minister Shinzo Abe came to power promising massive structural reforms.
But while Japan’s government is pushing companies to increase investment at home and raise wages to boost demand, stimulate the economy and escape deflation, the pace of improvement remains subdued.
Size of the economy
Where is Japan going?
After two decades of economic stagnation, Japan’s return to growth is hampered by the twin challenges of an ageing population and the mountain of public debt built up during years of on and off deflation.
The country’s main bet is to focus on higher growth, rather than fiscal consolidation, to tackle the world’s largest public debt of 246 per cent of gross domestic product. But progress has been slow.
Movements in the bond and currency markets are a barometer of investor expectations about a country’s economic prospects - and those of its rivals.
The Japanese Yen in particular tends to benefit from its perceived-safe haven status, particularly when there is turmoil in the Chinese markets.
Unemployment in Japan is currently at a 20-year low but the sharp division between regular workers with jobs for life, and part-timers with no security, has muted the effect on wages.
Labour mobility for regular workers is very low, while part-timers are often looking for security ahead of a pay hike.
Proportion out of work
Japan’s fiscal forecasts are banking on the structural reforms of Abenomics generating an acceleration in productivity growth to 2.2 per cent a year by the 2020s — the level prevailing in the 1980s.
Japan’s mission to banish deflation, which has dogged the economy for the best part of two decades, has faced headwinds both at home and externally. Pressure is building on the BoJ to launch another stimulus package.
Consumer price inflation
The slowdown in China, and the wobbles in the rest of Asia, threaten to hamper the growth of Japan’s exports. For 30 years until 2010, Japan had recorded a trade surplus every year, and its persistent trade surpluses were once the subject of political battles with the US.
But in 2014 Japan’s trade deficit was the worst on record, as the weaker yen has meant the country has been hit by a painful rise in the cost of imports. This came as the country was forced to import more fossil fuels after the Fukushima disaster.
Current account balance
Japan is banking on consumption rising to help it push inflation higher. But while wages have risen, this has not turned into rising consumption. Some policymakers fear this could be due to Japan’s aging demographics and pensioners struggling on fixed incomes. There are now seven pensioners for every 10 salaried workers — and the ratio is rising fast.
Consumption has also been weak since Japan lifted its national sales tax from 5 to 8 per cent in April of 2015 as part of its acute need for revenues.