It is five years since Shinzo Abe started his term as Prime Minister of Japan with the promise to revitalise the Japanese economy and put an end to lingering deflation with his ambitious "Abenomics" policies. This programme was based on substantial fiscal stimulus, monetary easing and structural reforms. We review the country's progress since 2013 and consider the future of Abenomics.

A favourable environment for some sectors

 In 2013, it seemed clear that Abe’s aggressive monetary policy and the resulting depreciation of the yen would succeed in halting deflation and creating a more favourable environment for businesses. Since then, their profits and share prices have been growing steadily and the economic climate has significantly improved. Against the background of a weaker yen and a buoyant global economy, there was a sharp rise in exports. At the same time, there was a recovery in domestic demand and investments by households, businesses and government organisations, stimulated by the improvement in consumer confidence and the looser monetary policy.

While the planned monetary and fiscal measures bore fruit, at least in the short term, the much-publicised and definitely the most important pillar of Abenomics – structural reforms – still has not proven entirely effective. The reforms and policy measures have led to improvements in some areas, such as the percentage of women in the workplace, company governance and rising tourism, which count among the great successes of Abenomics. Big export-focused manufacturing companies are among the beneficiaries of the falling yen. Meanwhile, supply company share prices have been boosted by the growing number of tourists from overseas.

Structural reforms to be continued

However, Abenomics has not been completely successful in all sectors. Some observers rightly point to the slow pace of reforms in several key sectors. The implementation of labour reforms is deemed essential, as these relate directly to one of the country’s major challenges: its demography. On one hand, the population is ageing and beginning to shrink, while on the other, even more worryingly, the labour pool is rapidly decreasing, as a large sector of the workforce reaches retirement age.  By 2040, the proportion of the population aged between 15 and 64 will have decreased by around 17 million, which is approximately a quarter of the country’s current workforce.

Japan’s demographics

Several major sectors are at risk of a labour shortage in the coming years. On the other side of the coin, there are opportunities to invest in businesses reaping the benefits of an ageing population. Demographics are also less of an issue for export-focused companies, as their growth potential depends primarily on factors outside Japan.

Concerned about economic instability? Invest in solid companies.

Abenomics has certainly improved the outlook for Japan. The economy has been growing for several quarters and companies are posting record profits. Yet these improvements are being generated at the expense of public finances and Bank of Japan’s stock market interventions are far from reassuring. Finally, and most importantly, the demographic conditions present a considerable threat, which is set to continue. Selectivity is therefore crucial when looking for companies to invest in. While it is difficult to predict the country’s future direction, it is clear that the majority of Japan’s best companies are on the right path. Companies with solid foundations and a competitive advantage operating in sectors with underlying growth potential will retain their profitability and expand their market value over the long term. They have the elements necessary for success, even if the journey to economic recovery is still turbulent.