Japan’s Economic Resurgence: Navigating Deflation and Embracing Innovation

What is driving Japan’s economic revival?

Japan’s economic story is one of great interest and has seen significant fluctuations over the years. In the 1980s, Japan was a shining example of economic success as the second largest economy in the world. However, in December 1989, the Japanese stock market peaked with 45% of the world’s stock market capitalization. This marked the beginning of three decades of economic stagnation and deflation, leading to Japan’s diminished presence in global markets. Today, Japan’s market participation stands at just 6%, but there are signs of a resurgence in the Japanese economy.

Inflation has returned to Japan after years of deflation, leading to an increase in earnings per share for the MSCI Japan index by 8.3%. Global demand for manufactured products and the improved pricing power of companies, particularly those targeting the domestic market, have also played a role in this resurgence. The Japanese market offers diversification opportunities that enhance portfolio performance and correlation.

Government policies have been instrumental in driving this economic turnaround. Reforms in the NISA program encouraged more investment in stock assets, while restructuring previously inefficient companies led to increased profits and better stock performance. While there are challenges such as an aging population and high government debt, Japan’s focus on areas like medical technology, factory automation, and transitioning to a low-carbon economy present opportunities for future growth and innovation. With measures in place to address these challenges, Japan’s long-term economic outlook is optimistic.

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