After more than two decades of weak growth, there are bright signals coming from the world’s third largest economy.
A new government led by Shinzo Abe took power the day after Christmas of 2012 and promised to do “whatever it takes” to make inflation to rise 2 percent in a country that has averaged deflation of -0.3% since the year 2000.
Upon his election, Abe quickly implemented a plan similar to the quantitative easing policy in the U.S. – except even larger, despite that the fact that the Japanese economy is only around half the size of the United States’. The result so far has been a massive gain of 50% in the Japanese stock market, as well a notable devaluation in the yen.
The yen’s devaluation is seen as positive as it will help the country’s exports, which fueled Japan’s boom in the 1970s through the 1980s, be more competitive. Economists continue to be bearish on Japan’s currency, because in order to meet Abe’s target of 2% inflation the yen would need to be devalued by 15% every year for the next five years.
But there are still many issues that the Japanese economy must face. The country has the highest debt to GDP ratio of any country in the entire world at over 200%, and an aging population places a burden on the country’s workforce. Regardless, there is good reason to stay bullish on Japanese equities and bearish on the yen, at least in the short term.
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