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Why Japan may finally emerge from its lost decades

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A tightening labor force may mean the end of decades of deflation in Japan, according to some analysts.
Just how stubborn is Japan’s deflation?
Consider a recent note from High Frequency Economics’ Carl Weinberg, about the World Economic Forum gathering in Davos in January. “It used to be that…sessions with the Bank of Japan governor would sell out. Not this year. Mega-Japan sessions were not on the program. The only time Japan came up was in conversations such as, ‘Is the fate of country ‘x’ going to be the same as Japan’s?’”
If investors have indeed given up on Japan, as Weinberg suggests, it may be with good reason. For years, despite the obvious pitfalls, Japanese policymakers have remained doggedly optimistic about licking deflation. As time goes by and they miss their inflation target yet again, they simply revise forecasts so that inflation remains forever just over the horizon.
But if investors have finally embraced a “fool me once” view after years of false hopes, they may miss out on one of the bigger market surprises of recent years. Some analysts are becoming just as hopeful as Japanese policymakers – and bullish prospects for the economy could mean even better prospects for markets.
“Our sense is that the economy is close to full employment,” said Peter Berezin, who runs global investment strategy for BCA Research. “It will take time for wages to grow but they will. There’s a good chance that Japan will soon be exiting its long dark era of deflation, which will be a huge surprise to investors.”
There are some fundamental reasons for Berezin’s belief: the structural issues that caused deflation to first take hold in Japan’s economy, including the bursting of the real estate bubble in 1991, and corporate deleveraging, are finally coming to an end.
What’s more, the government is finally throwing the full weight of a unified set of policies at the problem. Prime Minister Shinzo Abe took office in late 2012 vowing to shake deflation, but that goal was muddled by another that worked at cross-purposes: shoring up Japan’s fiscal health. The government increased the national sales tax in 2014 to whittle down the country’s debt burden, which is among the highest in the world. The tax increase — from 5% to 8% — throttled consumption and sent the country into a recession.

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