The Japanese economy might not be a pretty sight from an outside perspective owing to the myriad factors working against policymakers. Despite the troubling outlook, certain assets could certainly outperform given the circumstances, namely equities especially if the Bank of Japan expands its quantitative and qualitative easing program further. Considering the challenging external situation, it is not difficult to believe that policymakers will attempt to weaken the Yen further to maintain export competitiveness in the current leg of the global currency war. With that in mind, any weakness in the Yen is likely to see valuations become cheaper, propelling the Nikkei 225 higher versus other global benchmarks.

The Fundamental Picture

The Japanese economy has spiraling for over a decade as waves of deflation combined with a prolonged period of ultra-low interest rates failing to produce results. Although “Abenomics” as it was termed was able to largely turn around the economy to a degree, inflation and growth targets remain elusive for the globe’s third largest economy. Shinzo Abe, head of the Liberal Democratic Party and current Prime Minister, instituted the new set of drastic policies in the hopes of stimulating growth in a nation facing a burdensome amount of retirement liabilities coming due with the looming demographic time bomb. With the reproduction rates well below population replacement levels, the typical population pyramid has become inverted as the nation ages rapidly. Lack of growth of the base layers of the population make it extremely difficult for the island nation to indefinitely grow its way back to a healthy economy.

Aside from the demographic troubles, younger generations are experiencing difficulty when it comes to finding full-time employment, compounding problems in an economy where many workers are not retiring and extending working years due to limited retirement savings. The zero interest rate environment has particularly hurt savers in present economic conditions. While on the headline, unemployment stands at 3.30% wage growth has been stagnant with Japanese consumers seeing gradually eroded purchasing power in spite of persistent deflation. The export market is well supported at current levels due to Yen weakness, one policy benefit buoying many of Japan’s largest multinationals. However, the export economy neglects to address the underlying debt problem facing policymakers.