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What Japan’s Economic Reforms Mean for Them and Us

Despite seeing its economy stagnate for the past two decades or more, Japan is still one of the global economy’s giants with a gross domestic product of US$5.96 trillion in 2012, according to the World Bank (for some perspective, the US had a GDP of US$16.24 trillion in 2012).

In that year, Japan also accounted for S$22.6 billion and S$29.5 billion worth of Singapore’s exports and imports respectively. With such figures, it makes sense for us here in Singapore to watch Japan’s current attempt to boost its growth.

Japan’s Prime Minister Mr. Shinzo Abe is the one leading the charge with his economic reform policies, commonly termed as “Abenomics”. It concentrates on 3 main areas to stimulate growth and these are: 1) Monetary policies; 2) fiscal policies; and 3) structural reforms that would help reduce unemployment.

Japan’s economic reforms

After enduring a stagnant economy over the past two decades, Mr. Abe has set out to achieve an annual growth rate of at least 2% annually. While the small figure may seem to be an easy feat, Japan will have to potentially double its current pace of growth to achieve the Prime Minister’s aims.

The main obstacle Japan faces is similar to that of all advanced economies – an aging population. However, the case at Japan is way more amplified: The country expects a 40% decline in its labor force by 2050, indicating a much smaller workforce and thus, lower output.

Although Mr. Abe has since relaxed Japan’s immigration rules for highly skilled foreign workers, this may still not suffice. As a result, part of Abenomics also involves encouraging Japanese women to play a more active role in economic activities to help plug the gap in workforce numbers due to Japan’s severe aging population problem.

The economic reforms of Japan also has a focus on increasing investments in the country and one action taken in this regard is the slashing of corporate taxes in the country from a rate of over 35% to less than 30%; with lower corporate taxes, more foreign and local companies might be inclined to invest in Japan.

Lastly, Japan is also aiming for inflation to rise to 2%; for context, that’s a rate not seen since 1991 when it hit 3.3% according to the World Bank. Decades of deflation or slowing inflation has led to a halt in consumer spending with purchases hitting a record low. To induce more production and spending, it is critical that Japan reaches its 2% inflation goal. On that front, there’s some good news; according to the BOJ (Bank of Japan), the 2% inflation target is expected to be met soon sometime next year.

Foolish Summary

Currently, Japan’s growth is estimated at only 0.75% by the Organisation for Economic Co-operation and Development (OECD) and with the country having endured three recessions in the last five years, it would not be easy by any means for Japan’s economy to hit the targets set by Mr. Abe.

That said, Reuters had polled economists and they are confident that the aggressive measures taken by Mr. Abe and the areas he has initially targeted will help increase the probability of Japan eventually ending up on the right-growth track. With budding growth and rising asset prices, companies with substantial operations in Japan such as Saizen Real Estate Investment Trust (SGX: DZ8U) and Global Logistics Properties (SGX: MC0) may be rewarded in time to come.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.