- Japan’s economy is showing signs of increased activity after languishing for years.
- Inflation has remained subdued despite low unemployment, solid economic growth and rising equity values.
- While economic signs are positive in Japan, investors are still waiting for confirmation that growth there is sustainable without Central Bank intervention.
After decades of flat to negative economic growth, persistent deflationary pressures and stagnant wage growth, Japan’s economy has experienced a sustained recovery of late. As the global economic outlook has improved this year, so has Japan’s export-oriented economy, which is dominated by prolific automakers and innovative technology companies.
In my view, Japan’s long-struggling economy may be nearing the light at the end of the tunnel, but there is by no means any guarantee that it will emerge on the other side anytime soon. Gross domestic product (GDP) growth has continued to improve this year, rising 2.5% in the second quarter, roughly on par with the United States. Export activity is on the upswing, business capital expenditures are climbing, and the labor market is historically tight.
A Nation Without Inflation
However, one crucial element is missing: inflation. With so many other economic indicators in positive territory, one would expect to see higher inflation at some point. And, the fact is, that’s just not happening in the world’s third largest economy.
Consumer price increases generally have remained well below 1%, despite massive monetary stimulus measures from the Bank of Japan (BoJ) and many years of ultra-low interest rates. A big injection of BoJ stimulus in 2013 boosted inflation for a time, but it has since drifted lower, unable to sustain itself without aggressive central bank intervention.