Japan: slowly but surely, it’s getting there

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

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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.

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