Japan’s growth likely to remain low despite moves on labour reform

A deteriorating global economic environment is now weighing on growth in Japan, even as domestic demand has recovered from natural disasters in mid-2018, according to a leading rating agency. 

Moody’s, which rates Japan as 'A1 stable', has told clients that despite reasons to cautious, there is a fair degree of positivity around. “Japan's labour markets continue to tighten on account of ongoing improvements in labor force participation, while immigration reforms that became effective in April 2019 will help ease shortages in lower-skilled professions.”

However, in the absence of even more substantial structural reform, Japan's potential growth will remain lower than those of the country's similarly rated peers, Moody’s added, in an article in the latest edition of "Inside Japan", the agency bi-annual client compendium that highlights key credit events and trends in the country. 

The article also mentions that the weakness of Japan's merchandise exports has persisted through the fourth quarter of 2018 and worsened in early 2019.

“The outlook for external demand is further constrained by the potential for a further escalation in US-China trade frictions, as well as US trade policies such as the imposition of higher tariffs on automobiles and automobile parts,” Moody’s said.

The agency also noted that Japanese banks and insurers face challenges to profitability from structural impediments such as the aging and shrinking population, and ultralow domestic interest rates, as well as one-off factors such as catastrophe losses resulting from natural disasters.