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THE INVESTOR
remains the continued
rapid contraction of the
working population.
The number of foreign
workers has been
rising rapidly recently
but immigration
remains too low to halt
the population decline.
A comprehensive
policy to encourage
immigration has not
been enacted.Meanwhile,
one of the key factors
holding back productivity
growth is the low presence of
foreign firms. Due to high
non-tariff trade barriers and
opaque regulations, Japan’s stock of
inward foreign direct investment is the
lowest among OECD economies.
Moreover, policymakers have not followed
through on pledges to deregulate: in 2012,
the government set a goal of being placed
in the top three in the OECD in theWorld
Bank’s
Doing Business
report. Instead, Japan
has fallen back from 14th in 2012 to rank
26th in 2017
5
.
What’s more,Abenomics has largely
failed in generating inflation, a key goal after
years of deflation.Granted, inflation
strengthened in the year after the Bank of
Japan launched its aggressive asset-purchase
I
n the four years since he
returned to power, Prime
MinisterAbe has chalked up
several successes. For a start, the
economy has been growing
strongly by past standards,
helped by an unprecedented
surge in the proportion of
working-age women in paid employment
1
.
On most estimates, growth has been above
what is sustainable in the long term.As a
result, the unemployment rate has fallen to
a 23-year low
2
and the ratio of job offers to
applicants matches the highs reached during
the 1990s bubble.The outlook remains
upbeat;GDP should grow by 1.5% this
year,
3
which would be the strongest rise in
four years. External demand should
continue to expand and consumers are
finally awakening from the slumber they fell
into following the 2014 sales tax rise.
Another positive is the surge in corporate
profitability. Since the end of 2012,
aggregate gross profit margins have risen
by 50% to a record high,with the
improvement particularly pronounced in
the non-manufacturing sector.After-tax
profits have been further boosted by a cut in
the corporate tax rate, from nearly 40% in
2012 to just under 30% now
4
.
However, there has been less progress in
other areas.The main obstacle to stronger
growth in Japan over the medium term
Capital Economics’Senior Japan Economist,Marcel
Thieliant,on why he believes Japan’s economy will
continue to expand rapidly and a weaker yen would
provide a positive outlook for Japanese equities
By Marcel Thieliant
programme, but
that reflected a
temporary boost from higher
import prices and a brief spurt in domestic
demand ahead of the sales tax increase that
was introduced in 2014. Inflation has since
fallen back and on most measures is
currently around zero.
The immediate explanation why inflation