The recent economic resurgence in Japan has taken many by surprise, driven primarily by an unexpected surge in exports despite global market trends suggesting a slowdownThe nation has been viewed as a cautionary tale of stagnant growth, generational economic malaise, and lingering deflationary pressuresHowever, as we dive deeper, there are signs that the economic landscape of Japan may be experiencing a transformation, aided by external and internal factors contributing to this seemingly revitalized growth.

Traditionally, discussions surrounding Japan’s economy have been overshadowed by persistent narratives, echoing sentiments like the “lost thirty years,” referring to the stagnation following the economic bubble burst in the late 1980sThis period was characterized by a low-desire society, where consumer spending remained subdued amidst fears of ongoing deflation

Experts often cite Japan as a benchmark for what can go wrong in managing an economy, especially when examining issues like property market bubbles and balance sheet recessions.

Yet, recent quarterly figures present a stark contrastIn the second quarter of 2023, Japan's GDP experienced an astounding annualized growth rate of 6%, outperforming market expectations significantlyCloser analysis shows that the stock market has thrived as well, with a notable 22% increase in 2023, further indicating a stabilizing or, possibly, a thriving economy.

While many Western economic analysts often reference quarter-on-quarter performance for a clearer picture of economic trends, can this robust Japanese data merely reflect short-lived fluctuations? Initially, it may seem that the average figure of just under 3% growth, over the past five quarters, paints a modest picture

• Dollar Index Soars
• Significant Depreciation of the Won
• Decline in European Corporate Profits
• Decline in U.S. Treasury Yields
• Wall Street Banks Seek Transparency

However, in the broader context of Japan's historical growth, where GDP growth hovered below 1% for over a decade, even a 3% figure is promising compared to developed economies in Europe and North America.

What has triggered this resurgence? Key factors include a rebound in property prices and inflation, which may have contributed to changing consumer behaviors and investor confidenceThe booming second-quarter GDP correlates closely with a notable increase in net exportsAmid a backdrop of decelerating global economic growth, how has Japan's product exportation managed to thrive? A significant factor is the depreciation of the yen, which has bolstered global competitiveness for Japanese goods, resulting in a remarkable export surge.

Over the past two years, firms in the US and Europe have struggled with surging inflation, forcing central banks to implement aggressive interest rate hikes

Meanwhile, Japan has maintained a favorable inflation environment, allowing the Bank of Japan to uphold near-zero interest rates, subsequently causing the yen to weaken significantly against the dollarTo put this in context, the dollar's value rose from about 100 yen in 2021 to approximately 145 yen today, a staggering depreciation of over 40%. Thus, Japan's export growth rates soared, registering 21.5% and 18.2% in 2021 and 2022, respectively.

However, short-lived economic growth should always be taken with a pinch of cautionIt is integral to investigate long-term changes in Japan's economic narrativeOnce primarily characterized as “the lost thirty years,” there are indications this narrative is gradually shiftingJapan's economy reached a peak prosperity in the late 1980s but spiraled into stagnation following the crash of its real estate bubble.

Over the last two decades, property prices in Japan saw sustained declines

Nevertheless, with the implementation of ‘Abenomics’ in 2012, a series of monetary and fiscal policy strategies initiated by Prime Minister Shinzo Abe aimed at revitalizing the economy began to take effectFollowing years of decline, residential property prices finally stabilized around 2014 and entered a recovery phaseBetween 2014 and 2019, comprehensive housing prices rebounded by approximately 20%, while the post-pandemic era (2020-2022) witnessed a further 25% increase in values.

Low borrowing costs have also drawn substantial foreign investments into Japan's real estate marketNotably, Blackstone, one of the world's largest investment management companies, has aggressively acquired Japanese properties since 2020, a clear sign of renewed confidence in the market.

The notion of persistent deflation is another daunting tag associated with Japan

When discussing deflation, Japan often comes to mind, where negative interest rates became a peculiar aspect of its economic landscapeEven with prolonged ultra-loose monetary policies, deflation seemed unabatedThe enduring fear surrounding falling prices promoted cash hoarding over consumer spendingBetween 1992 and 2021, Japan's annual consumer price index (CPI) grew by merely 0.27%, punctuated by periods of negative CPI growthHowever, signs indicate this deflationary era is waning, with a CPI growth of 2.5% in 2022 signaling a return to normal levels of inflation.

From historical monthly data, it can be observed that Japan's CPI growth exceeded 3% for a continuous twelve-month span from August 2022, a unique occurrence within the past 30 yearsConsequently, the persistent cloud of deflation appears to have finally dissipated.

Moreover, wage growth among Japanese workers has recently picked up pace

For the past three decades, wages remained stagnantAs reported by the Organisation for Economic Co-operation and Development (OECD), Japan’s average annual salary amounted to $39,711 in 2021, a mere increase of $2,000 from 1991 levelsThe prolonged economic stagnation hampered businesses’ ability to offer raises, resulting in limited disposable income for employeesThis cycle perpetuated low consumer spending and economic inertia.

However, recent data suggests a break from this cycle, with rising inflation fueling wage growthDuring the spring labor negotiations, unions vigorously advocated for salary increases, achieving noteworthy outcomes with the support of the governmentAccording to a report from Japan's Economic Federation in May, major corporations lifted employee wages by an average of 3.91% in the spring of 2023, the highest increment recorded in nearly three decades.

Furthermore, both corporations and consumers have resumed leveraging trends

Following the real estate bubble burst, both sectors suffered substantial blows to their balance sheets and engaged in deleveraging for over two decades, underscoring significant hurdles during Japan's “lost thirty years.” Although the government’s efforts to adopt leverage did not significantly improve the economic climate, a paradigm shift began around 2016. Companies and individuals have cautiously ramped up their leveraging activities, especially from 2018 onwardsAccording to the Bank for International Settlements (BIS), Japan's non-financial sector credit as a percentage of GDP increased from 95.1% at the beginning of 2018 to 116.1% by the end of 2020.

The ongoing transformation in Japan suggests lessons for global economies grappling with similar issues:

First, the collapse of the real estate market can induce prolonged deleveraging periods for both consumers and businesses, as seen in Japan's protracted recovery phase spanning over two decades.

Second, tackling deflation presents considerably more challenges than addressing inflation

Traditional economic strategies often prime toward countering inflation; however, experiences from Japan in the 1990s and the US post-2008 financial crisis exemplify that combating deflation is far more complex.

Third, the proactive macroeconomic policies implemented under Abenomics have played a vital role in steering Japan’s economic recovery, restoring momentum in the housing market and enabling consumer sectors to begin managing leverage once moreMaintaining accommodating monetary policies has proven effective in fostering growth without inducing heightened inflation levels.

Lastly, endured hardship often leads to eventual recoveryReal estate, as a perennial sector, historically rebounds post-bubbleFollowing extensive balance sheet repairs and stabilizing markets, both businesses and consumers inevitably proceed to reintegrate leverage strategies.