News that Japan’s third-quarter GDP slowed to 1.9% has certainly given some ammunition to investors who believe Japan’s economy is losing momentum at best—or is careening toward a debt and currency crisis at worst.
Over the past year, Japanese Prime Minister Shinzo Abe has had some success reviving the world’s third biggest economy with a mix of fiscal stimulus, radical monetary expansion and tax incentives to boost business. The policies, known as Abenomics, have triggered an explosive rally in the Nikkei, which is up 45% as of November 14, 2013.
However, there are two big challenges facing Japan. First off, the fiscal easing and the Bank of Japan’s bond buying program haven’t been followed up with industry deregulatory reforms Abe has promised to secure long-term growth.
Secondly, Abe is hemmed in by Japan’s gargantuan debt burden, the highest in the developed world. The International Monetary Fund sees Japan’s government debt reaching 310% of its GDP by 2030 if Abenomics don’t deliver on promised economic reforms to increase trade and open up more protected businesses to global competition.