Japan leaves the world standing

Japan's economy has just enjoyed its longest streak of growth since the mid-2000s, with a healthy rise in business investment and household consumption.

The Japanese economy has just produced the sort of performance that "the rest of the world can only dream of", says FAZ.net. In the second quarter, GDP expanded at an annualised rate of 4%, far higher than the 2.5% analysts had pencilled in and a hefty rise on the first quarter's 1.5%. Since Prime Minister Shinzo Abe and his government launched a programme to end years of stagnation in 2012, GDP has risen by 7%.

The economy has also just enjoyed its longest streak of growth since the mid-2000s. We are used to hearing that Japan depends on trade, but the latest quarter was marked by a healthy rise in business investment and household consumption, which accounts for around two-thirds of GDP. Annualised spending on big-ticket durable items such as cars and fridges jumped by 10% year-on-year. People ate out more too. Household spending overall jumped by an annualised 3.7%.

The data "bounce around a lot", as Quentin Webb notes on Breakingviews.Preliminary figures can "change dramatically". But this is definitely encouraging". One of the main aims of Abenomics, the government's three-pronged stimulus programme of money printing, spending and structural reforms, was to create a virtuous circle. The hope was that workers would earn more and open their wallets, with the additional demand pushing prices up, leading to more pay rises to keep up with inflation. "Extra spending on cars and meals alone will not make the difference, but it is a step in the right direction."

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It seems households have "finally overcome" the consumption tax (VAT equivalent) hike in 2014, which rattled them and dampened spending, says Societe Generale's Takuji Aida. A key reason they are becoming more cheerful is the tightening labour market, which is laying the foundations for a rise in demand. Unemployment has slipped below 3%, and basic pay has edged higher for four years. Hourly earnings for part-time workers are climbing at 3.1% year-on-year, the fastest pace in eight years, says Capital Economics. Overall, wage growth has lagged the tight labour market, but it is at least heading upwards and should rise faster as demand for labour keps rising.

With consumer-price inflation barely positive, however, it will be some time before the Bank of Japan hits its 2% target. So it is will keep printing money, which is good news for stocks. Japan is also tackling corporate governance reform, while the government pension investment fund, the world's biggest, has become a buyer of equities in recent years. Throw in reasonable valuations, and 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.