Japan's GDP grew by 2.2 percent in the fourth quarter of 2014 because of exports. Despite an expectation of 3.6 percent growth, many economists believe Japan's dark days are passing.
This news gives Prime Minister Shinzo Abe enough wiggle room to implement more of his growth-based policies, otherwise known as "Abenomics." Abenomics has "three arrows," which are structural reforms, fiscal stimulus and easy money. His aim is to get Japan out of its two-decade economic slump, but there are some hurdles to overcome.
Consumer Confidence Waning
Even though Japan is an export-driven economy, the prime minister still needs to boost consumer confidence because consumption represents 60 percent of the economy. But Abe certainly did not do himself any favors by raising the consumption tax from 5 percent to 8 percent last year, and history has shown that Japanese prime ministers who raise the consumption tax do not last long politically. But the government did so to pay down its skyrocketing debt regardless of alienating the public. A bonus that works to Abe's advantage is lower oil prices. Lower energy prices give consumers extra money to put back into the economy for the short-term, but this stifles inflation, slowing down the government's ability to combat deflation.
Wages Growth Remains Stagnant
The Japanese economy needs a wage increase across the board, and wage growth has not been in sync with inflationary prices. As part of his structural reform plan, Abe hopes to draw more women into the labor pool to boost disposable income. The problem is that female participation has only increased from 48.2 percent in 2013 to 49.3 percent in 2014. Abe has also failed to convince many employers to increase wages, even though these companies are benefiting from a weaker yen.
Make or Break for Japan
Critics believe Abenomics is more akin to "Abeggedon" because of its contradictory policies and preference for large corporations. Opponents argue that large companies are not increasing wages because owners are hoarding the rewards. With higher export values, stimulus money and lower tax rates, companies seem to be forgetting about the average worker. Abe's low approval ratings in the past year is a sign of growing discontent among the populace, and the consumption tax hike may still come back to haunt this administration.
Politics Hampers Trade
Japan's isolation in the region is another reason why its economy cannot gain steady ground. One example is when Abe visited the Yasukuni Shrine in 2013— a site which enshrines the names of 14 war criminals who were convicted by a Japanese military court. His visit angered nations such as China and South Korea, both colonized by Japan during World War Two. But the good news is that Japan's status in Asia has not entirely damaged its economic capabilities. The nation's export partners still include China at 18 percent, South Korea at 7 percent and Taiwan at 6 percent. The United States is Japan's largest export partner at 18.5 percent. However, Abe's nationalistic fervor is another barrier that prevents Japan from fostering deeper economic ties with major players in Asia, including emerging markets.