Japan: slowly but surely, it’s getting there

The key to overcoming deflation and stagnation in Japan lies in the labour market.

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.

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.

Recommended

How long can the good times roll?
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
The charts that matter: the dollar flexes its muscles
Global Economy

The charts that matter: the dollar flexes its muscles

As the US dollar made significant gains this week, everything else sold off. John Stepek looks at how it's affected the charts that matter most to the…
26 Sep 2020
The world's central banks will follow the Federal Reserve's example
Global Economy

The world's central banks will follow the Federal Reserve's example

The US Federal Reserve – America's central bank – has said that it would become more tolerant of inflation and hold interest rates down. Others will f…
25 Sep 2020
Oil producers are back at their Covid-19 lows – is it time to buy?
Oil

Oil producers are back at their Covid-19 lows – is it time to buy?

With demand for oil hammered by Covid-19 and talk of “peak oil demand”, there are lots of good reasons to be bearish on oil producers. So, asks John S…
22 Sep 2020

Most Popular

The electric-car bubble could get an awful lot bigger from here
Renewables

The electric-car bubble could get an awful lot bigger from here

The switch to electric cars is driving a huge investment bubble. But that’s not necessarily a bad thing, says John Stepek. Fortunes will be made and l…
24 Sep 2020
How the stamp duty holiday is pushing up house prices
Stamp duty

How the stamp duty holiday is pushing up house prices

Stamp duty is an awful tax and should be replaced by something better. But its temporary removal is driving up house prices, says Merryn Somerset Webb…
25 Sep 2020
Can Rishi Sunak’s winter plan save the UK economy?
UK Economy

Can Rishi Sunak’s winter plan save the UK economy?

With his Winter Economic Plan, chancellor Rishi Sunak is hoping to support the economy through the dark months ahead as restrictions tighten again. Jo…
25 Sep 2020