Is Japan poised for an economic revival?

TOKYO, Jul 15 ( - This question is being asked amid newfound optimism by foreign investors in Japan’s stock market. It has been the one of top-performing markets globally this year, with the Nikkei 225 index rising by 23 percent to a 33-year high.

The catalysts are mainly value related: Japan’s stock market is now considerably cheaper than the U.S. market after it lagged considerably for three decades. Also, the 20 percent depreciation of the Japanese yen against the U.S. dollar during 2021-2022 improved the international competitiveness of Japanese businesses.

There is also an important geopolitical consideration at play: Namely, Japan is now being viewed as an alternative investment outlet to China, as multinational companies diversify their supply chains in the wake of the COVID-19 pandemic and heightened tensions between the U.S. and China. For example, seven of the world’s largest semiconductor makers have made plans to increase manufacturing and deepen tech partnerships in Japan according to the Financial Times.

Still, most economists are skeptical that the Japanese government can revive the country’s dynamism in the 1970s and 1980s when it rivaled the U.S. economy. Japan’s economy has languished since the bursting of the stock market and real estate bubble in the early 1990s, and it has struggled with deflation for the past three decades. In the meantime, the economy’s potential real GDP growth has slowed to 1 percent per annum as the labor force has shrunk over time.

Against this backdrop, Prime Minister Fumio Kishida launched his “new capitalism” initiative one year ago with the goal of boosting economic growth and lessening income inequality. The essence of the concept is to produce a “virtuous cycle of growth and distribution” in which faster economic growth supports social goals through higher wages and household tax deductions. ...continue reading