Japan: slowly but surely, it’s getting there

published 8 December 2017

874-Abe-634 — Abenomics has paid off handsomely

Japan's economy has improved since the launch of Abenomics, Prime Minister Shinzo Abe's fiscal and monetary stimulus programme, in 2012. It has helped bring about the longest stretch of GDP growth in 16 years. But the key to overcoming deflation and stagnation lies in the labour market: analysts want to see a wage-price spiral, whereby wage rises fuel confidence and demand for goods, leading to price rises, which in turn stimulate more wage increases, and so on.

The good news is that slowly but surely we seem to be getting there, notes Pantheon Macroeconomics. In October, the unemployment rate remained unchanged at 2.8%, the lowest in 22 years.The number of jobs available jumped by 48,000, the largest monthly total in five years. Unemployment will keep falling as firms try to fill these positions, but "finding enough unemployed people at this stage of the cycle will be tricky".

Households are already feeling pretty bullish: consumer confidence is at a four-year high. All this implies rising wages. An index gauging expectations for wages is already at its highest level since before the financial crisis, although it is still far from indicating a fast jump in earnings.

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While the fundamentals outlook keeps getting better, corporate governance is also heading in the right direction, with dividends and buybacks up. The government's public-sector pension fund is buying equities, as is the Bank of Japan. What's more, Japan's forward price-earnings ratio in late October stood at 14.2, compared with 15.1 for Europe and 17.9 for the US, says Tim Price in a Price Value Partners note. Yet the market remains "under-owned both globally and locally"; just 3.6% of UK investors' assets are invested there. It's hard to believe this won't change soon.

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.