Japan's economic landscape has recently startled observers as it seems to be shaking off a long-standing period of stagnationFor many years, the country was often characterized by phrases such as "lost decades," "low desire society," and "deflation." Economists and analysts, particularly from China, frequently cited Japan's economic plight as a cautionary tale, warning against the pitfalls of falling into similar patterns of real estate bubbles and balance sheet recessionsHowever, the current data paints a different picture, transitioning from a narrative of decline to one of unexpected resurgence.

In the second quarter of 2023, Japan's Gross Domestic Product (GDP) saw a remarkable year-on-year growth rate of 6%, far exceeding market predictionsAdditionally, the Tokyo stock market experienced a 22% increase in 2023 alone, reaching historic highs and serving as a reliable barometer of the economy's healthSuch robust figures raise questions about the sustainability of this growth and whether it represents a brief anomaly or a significant shift in Japan's economic trajectory.

While Western economies often focus on quarter-on-quarter growth to gauge economic performance—where volatility can be pronounced—Japan's statistics indicate a consistent upward trendThe first quarter of 2023 alone recorded a 3.7% increase, continuing a streak of five consecutive quarters of growth, with an average of 2.8% per quarterWhile an average growth rate of just under 3% may seem modest, it stands in stark contrast to Japan's previous decade where averages struggled to breach the 1% markIt begs the question: what has triggered this newfound dynamism?

Key factors contributing to this revitalization appear to be a rebound in real estate prices and a noticeable increase in inflation

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In the second quarter of 2023, Japan's impressive economic growth can largely be attributed to a significant increase in net exports—a phenomenon puzzling to many, given the prevailing global economic slowdownA critical aspect of Japan's renewed competitiveness in the export sector is the significant depreciation of the yen, which has made Japanese goods more appealing to foreign buyers.

To understand this depreciation, one must take into account the broader economic landscapeIn a bid to combat soaring inflation, Western nations have resorted to aggressive interest rate hikesIn contrast, Japan maintained a zero-interest-rate policy, creating an environment ripe for currency depreciationSince 2021, the yen has weakened considerably against the dollar, dropping from around 100 yen to approximately 145 yen to the dollar—a staggering decline of over 40%. This devaluation has directly reflected on Japan's export figures, which surged by 21.5% and 18.2% in 2021 and 2022, respectively.

Short-term economic fluctuations are not uncommon, and assessing 1-2 years can sometimes mask deeper issuesWhen we examine the long-standing labels associated with Japan's economy, we start to see a potential shift—if we revisit the term "lost decades," we must acknowledge the underlying reasons for its origin.

Historically, the economic boom Japan enjoyed in the late 1980s culminated in a harsh downturn, akin to a once-bright star losing its lustreThis was largely due to the bursting of an enormous real estate bubble, which initiated a downward spiral that many economists argue has prolonged Japan's economic malaiseFor over 20 years, housing prices fell, dictating the pace of economic recovery.

However, things began to change with the advent of "Abenomics," the series of economic policies implemented by former Prime Minister Shinzo Abe

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Following years of stagnation, 2014 marked a turning point when Japanese property prices began a gradual recovery—finally scraping the bottom after decades of declineBetween 2014 and 2019, the overall property market appreciated by almost 20%. Post-pandemic conditions are further driving an upswing, with prices soaring approximately 25% from 2020 to 2022. This trend marks approximately a decade of recovery for the real estate sector, virtually vanquishing remnants of the previous bubble's aftermath.

The rising demand and increasing property values have attracted significant foreign investment, notably from major global asset management firmsBlackstone Group, for example, has actively sought to capitalize on these shifting landscapes by acquiring Japanese real estate properties since 2020. Such interest underlines the palpable confidence in Japan's economic revival.

Another critical label once firmly attached to the Japanese economic profile was "deflation." This phenomenon, synonymous with a persistent unwillingness to spend, characterized the nation's economy for decadesEven with the Bank of Japan's efforts towards looser monetary policy, deflationary pressures remained stubbornly resistant to changeBrushing up against consumer sentiment, deflation boosts the allure of cash in hand, leading to decreased consumption and investment—a paradox that stymied economic growth.

Data from 1992 to 2021 reveals a paltry average annual increase in Japan’s Consumer Price Index (CPI) of just 0.27%. The early 2000s featured persistent episodes of negative CPI growth, highlighting the epidemic nature of this economic conditionHowever, 2022 marked a turning point, as the CPI registered an annual growth of 2.5%, crossing over into what many consider to be a normalized inflation range.

The months that followed painted an even more optimistic picture as the CPI has sustained growth rates of over 3% since August 2022, marking an unprecedented occurrence in over three decades

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As the deflationary shadow lifts from Japan's economy, it correlates strongly with wage growth—a critical indicator of economic health.

For years, wages in Japan stagnated, barely breaking past the 1991 levelsAccording to OECD data, the average annual salary in 2021 was a mere $39,711, not much better than the $37,866 reported three decades priorThis stagnation reflected not just the labor market's incapacity to sustain any meaningful wage growth, but also restrained consumer spending—a cyclical trap that the Japanese government struggled to navigateHowever, recent advancements suggest that the cycle may be breakingThe inflation uptick has spurred labor negotiations, allowing unions to advocate for pay raises that have yielded encouraging resultsAccording to the Japan Business Federation, major companies agreed to a 3.91% salary increase in their 2023 spring wage negotiations, the highest in nearly 30 years.

Furthermore, the economic landscape is evolving, with both enterprises and households engaging in what can be described as a process of "re-leveraging." A significant impact of the post-bubble era was the extensive deleveraging that both sectors underwent, severely damaging balance sheetsThis deleveraging process lasted more than two decades and played a crucial role in the "lost decades" conceptDuring this time, the government resorted to increasing its leverage without managing to ignite significant economic growth.

A significant turnaround appeared after 2016 as corporate and household borrowing began to pick up, a trend that accelerated notably post-2018. Data from the Bank for International Settlements highlights this shift, with the credit to GDP ratio in Japan's non-financial sector climbing from 95.1% at the beginning of 2018 to 116.1% by the end of 2020. Concurrently, credit from the household sector also saw increases, moving from 60.4% to 67.5% of GDP.

Japan's trajectory away from the "lost decades" presents several key takeaways for both policymakers and economists alike.

Firstly, the impact of a collapsing real estate market can lead to protracted deleveraging that weighs down enterprises and households

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