Illuminate: Japan, growth and the return of the Trump trade

As Prime Minister Theresa May proved earlier this year, political gambles can backfire. But this was not the case for Japan’s prime minister Shinzo Abe, who last month pulled off another decisive election victory.

In a country where politicians come and go, Abe’s landslide success deserves high praise. Should he stay in office for two more years he will become Japan’s longest serving prime minister since the Second World War.

Abe’s three-pronged approach towards tackling the country’s economic stagnation appears to be gaining real traction. Monetary easing, fiscal stimulus and structural reform all seem to be gradually paying off in economic terms. Now, they’re paying off politically too.

One of the general gauges for economic sentiment in Japan is the Tankan Index, which covers thousands of companies above a certain amount of capital. Recently the overall Tankan index, covering all industries and companies of all sizes, rose by three points to +15, the highest reading since September 1991.

Other indices and measures also point towards continuing economic improvement. The Japanese economy has now expanded in six straight quarters, the first period of sustained growth in more than three years. It’s also the highest rate of growth since the first quarter of 2015.

But the data also shows companies experiencing labour shortages, with the index for employment conditions weakening by three points to -28. Japan’s unemployment rate remains at just 2.8 per cent, coming down from its highest ever level of 5.5 per cent in 2002.

A juncture has been reached. Either rising wages will lead to a more self-sustained recovery, or more structural reform may be required to return Japan’s labour market to the flexibility it displayed in the past.

We expect gradual wage rises to be recorded over the coming months, perhaps further aided by public encouragement from the government that now is the time to seek better paying jobs. The public has given Abe and his government a mandate for change, but sooner or later they are likely to want this support to be repaid in the form of rising wages.

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