Japan, as the world’s third-largest economy and America’s most important ally in Asia, is an essential catalyst for Asian growth and global prosperity. It will remain one of the most important economies in 2014, and after nearly two decades of stagnation, the current outlook appears encouraging.

Seven Signs of Promise From 2013

1. Japanese shares closed 2013 at a 57 percent annual gain for the strongest showing since 1973.

2. The yen weakened against the dollar, boosting Japanese exports for nine consecutive months to November 2013. Much of this gain was in auto exports to the U.S. and China.

3. Topix market shares rose in December beyond the important 1,300 mark for the first time since August 2008

4. The Japanese Government set in motion a 18.6 trillion yen ($182 billion) stimulus package in December that includes 5.5 trillion aimed at offsetting a planned consumer tax hike.

5. With a CPI rise of 0.3 percent in October, the hope of exiting deflation is showing signs of promise.

6. M&A activity picked up, including deals such as Tokyo Electron’s $6.8 billion merger with Applied Materials and Sumitomo Mitsui Financial Group’s acquisition of the U.S. railcar leasing business Perella Weinberg Partners LP for a price estimated at between $290 and $490 million.

7. The economy grew by about 3 percent in the second half of 2013, one of the fastest growth rates among the developed nations.

Seven Issues to Watch in 2014

1. A consumption tax hike planned for April could take in about 8 trillion yen. The increase is a central part of the “Abenomics” overhaul of the economy, and the hope is that the government spending that accompanies it will offset any drag on the economy. A similar tax rise had a negative effect in 1997.

2. A corporate tax rate cut to 35.64 percent from 38.01 percent. The expectation is that the tax relief will translate into greater capital spending and wage hikes for workers that in turn will lead to increased consumption.

3. The potential for equity markets to remain strong: Japanese stocks on the Nikkei trade at 1.5 times book value, which is about a 40 percent discount to the U.S. stock market.

4. Progress in the Trans-Pacific Partnership (TPP). If Prime Minister Shinzo Abe can get the powerful farm lobby to go along, completion of the three-year-old negotiations could help grow the economy.

5. An increase in M&As throughout Asia. Japanese firms, which were left relatively unscathed by the financial crisis, have pushed into global markets in finance, manufacturing and technology. Japanese banks especially have been buying assets overseas in their search for growth beyond domestic shores.

6. The 2020 Summer Olympics, which will be held in Japan. Infrastructure spending for the Games should give the domestic economy a further boost.

7. An expected focus on strategic sectors: 1) Energy – Japan is the world’s largest importer of liquefied natural gas. 2) Agriculture, forestry and fisheries – Asian markets beckon. 3) Transportation and logistics – Japan’s advanced technologies can satisfy the latent demand in developed and developing nations.

Three Challenges

1. Japan’s ability to power economic growth with a viable energy policy in the shadow of the 2011 Fukushima nuclear disaster is still an open question.

2. So too is the ability of Japan to respond to competition from China and South Korea. Huwei telecommunications equipment, Samsung electronics and Hyundai automobiles may matter more to global consumers than Softbank, SONY or Honda.

3. Issues like Japan’s World War II legacy and territorial disputes may take leaders’ focus away from critical economic issues.

IMPLICATIONS FOR BUSINESS:
Seen in the context of two decades of malaise, Japan’s economic reemergence in 2013 is a tribute to Prime Minister Abe’s economic reforms. Despite the geo-political and security issues making the headlines, the present trajectory gives rise to cautious optimism for a bullish 2014.

© The Dilenschneider Group and Orlando Camargo