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Economics & Markets

How Japan is moving on from its ‘lost decade’

By Diana Mousina
Economist - Investment Strategy & Dynamic Markets Sydney, Australia

Japan has taken massive strides to recover from its prolonged period of economic stagnation, bringing concepts and strategies to the table that are unique and progressive on a global scale. These paint a distinctly different picture for its future, compared to its past.

A snapshot: the story so far

On October 1 Japan’s consumption tax was lifted from 8 percent to 10 percent, in a move that some analysts predict could put the brakes on the country’s recent run of promising GDP growth1. It says something that the physicians in Shinzo Abe’s administration think their patient sufficiently robust to withstand such treatment, given Japan’s slow and unsteady path out of their “lost decades” in the 1990s and 2000s. Two previous consumption tax hikes, in 1997 and in 2014, have both been followed by recession and the Government has twice delayed this increase due to weakness in the economy.2

Whether the outcome on this occasion will be any different remains to be seen. The slowing global economy and the trade stand-off between the USA and China certainly won’t help3. Whilst Japan has recorded its third consecutive quarter of GDP growth, inflation slipped to a 2.5 year low in September4, manufacturing activity and sentiment have both softened significantly5 6, and growth in capital expenditure – the crucial indicator of how quickly Japanese companies are able to mechanise their declining labour force – also declined over the last quarter7.

If Japan’s economy does shake off the effects of this latest tax consumption tax increase and resist slowing global conditions, the Bank of Japan’s audacious quantitative easing programs are likely to attract most of the limelight. However, a crucial differentiator in this case may be that, in contrast to 2014, the structural reforms that constitute the third plank of “Abenomics” (alongside aggressive fiscal and monetary stimulus) may begin to make their effects felt.


Increasing the Japanese workforce in the face of declining birth rates has been a priority for the government since its election. Abe (who claims no responsibility for the word Abenomics) announced Womenomics as a deliberate strategy in 2013, setting the country a goal of lifting women’s workforce participation from 68 to 73% by 20208. Government initiatives to support this funding comprised primarily of generous funding packages for education and childcare, making it easier and more socially acceptable for women to balance their family life with their career. Corporations were also required to increase the appointment of women to management positions, and the government also took broader steps to tackle the Japanese culture of overwork9.

As of June 2019, 71.3% of women in the primary working age from 15 to 64 had jobs, up 1.9 percentage points from a year ago, and 90% of the increase in the workforce over the twelve months (530,000 workers) were accounted for by women. Less progress has been made in addressing the lack of women in management and the gender pay gap10.

Corporate governance

Japan’s unique corporate culture, home of the traditional “community firm”, which placed the interests of management and employees ahead of those of shareholders. Revenues were too frequently held as cash, rather than invested or returned as dividends to shareholders11.

The government tackled these issues head-on with their 2015 corporate governance code, which sought to boost capital efficiency and challenge vested interests by mandating increased diversity on Japanese boards12. Reflecting these priorities, the Japanese Stock Exchange in 2014 established the Nikkei 400, composed of companies that meet global investment standards, such as efficient use of capital and investor-focused management perspectives.

Senior corporate leaders have since taken the bit between their teeth in relation to Environmental, Social and Governance (ESG) issues. The Government Pension Investment Fund, the largest such fund in the world, has become a trailblazer, not only in championing governance reforms at a local level, but in positioning Japanese commerce to take a large stakeholding in sustainable investing13.

Government agencies and departments have taken further steps to incentivise such measures, for example by offering better trade insurance terms for projects which offer transparency around their ESG principles14. These initiatives are not being carried out in isolation from financial imperatives; they reflect a deliberate agenda to better position Japanese companies, who today are part of a modern, globally-oriented, service based economy, to meet the needs of investors and customers.

Where to from here?

There’s no denying the reality of the current global climate, and the Japanese economy looks set to grapple with the twin demons of its demographic cliff and expectations around inflation for many years to come. But as these conditions start to impact other parts of the developed world, the steps that Japan has taken in the name of structural reform - to increase its rate of labour participation, transform its lazy balance sheets, and increase the accountability of its companies to customers, shareholders and investors – will begin to pay the kind of dividends that may help it finally shake its cycle of recession and deflation.

1 Nagata, K. & Sugiyama, S. (2019), Despite government steps, Japan's consumption will take a hit from tax hike, analysts say, Japan Times, September 2019
2 The Business Times (2019), Japan to hike consumption tax on Oct 1 despite recession fears, September 2019
3 Woodhouse, A. (2019), Japanese manufacturing gloom reaches six-year high, Financial Times, October 2019
4 Shane, D. (2019a), Japan consumer price growth falls to 2-year low in August, Financial Times, September 2019
5 Woodhouse, A. (2019)
6 Shane. D. (2019b), Japan’s manufacturing activity falls to 7-month low, Financial Times, September 2019
7 Kajimoto, T. (2019), Japan second-quarter GDP seen revised down as external risks hit capex: Reuters poll, Reuters, September 2019
8 Abe, S. (2013), Unleashing the Power of 'Womenomics', Wall Street Journal, September 2013
9 McBride, J. & Xu, B. (2018), Abenomics and the Japanese Economy, Council on Foreign Relations, March 2018
10 Japan Times (2019), Women still can't reach potential, August 2019
11 The Economist (2015), Winds of change, June 2015
12 Vilburn, C. (2018), Investors stand to gain from Japan's corporate governance reforms, Nikkei Asian Review April 2018
13 Plender, J. (2019), Norway and Japan show the conflicting approaches to ESG investment, Financial Times, June 2019
14 Goso, S. (2019), Japan sweetens insurance terms for ESG-conscious companies, Nikkei Asian Review, July 2019

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Diana Mousina, Senior Economist
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While every care has been taken in the preparation of this article, AMP Capital Investors (UK) Limited, Registered Office at Companies House, 4th Floor Berkeley Square House, Berkeley Square, London W1J 6BX (no. 05524536) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

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