Japan: Abe’s arrows hit home

Japan’s prime minister, Shinzo Abe, is trying to tackle the country's low economic growth with a package of reforms.

In the late 1980s Japan's potential growth rate was estimated at around 4% by the Bank of Japan. These days the economy's speed limit is thought to be less than 1%.

That's for three main reasons: the working-age population is shrinking; companies have slashed investing after years of stagnation; and productivity has dwindled.

Japan's prime minister, Shinzo Abe, is now trying to tackle this with a package of reforms aimed at boosting productivity and, ultimately, growth. This is the so-called Third Arrow' of his programme to end years of deflation (the first two were money printing and more government spending).

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Some have criticised the reforms as too timid. But as one former US official told Reuters, it's unrealistic to expect an attempt to overcome all of the economy's vested interests in one go. "It isn't a Big Bang", but it is a lot better than previous reform packages that failed. The reforms are likely to produce "less than Abe hopes but more than sceptics expect", says David Pilling in the Financial Times.


Meanwhile, it is working on improving corporate governance via the new JPX-Nikkei 400 stock index, which government pension funds are being encouraged to invest in. The government also plans to expand a foreign trainee programme which may be a tentative first step to boosting immigration to offset the shrinking native workforce.

Much depends on whether the government delivers. But if it can, says JPMorgan's Jesper Koll, the economy's potential growth rate could rise from 0.8% a year now to 1.5% in the medium term. The Bank of Japan is also ready to print more money to reach its inflation target of 2%, which it currently looks like missing.

The economy is recovering from April's hike in the consumption tax, and companies look cheap. According to Morgan Stanley, the market's forward p/e hasn't been this low compared to its developed-market counterparts for 20 years. Japan remains a buy.

Andrew Van Sickle

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.