Japan. When talking about the outlook for the Japanese economy, the first question is normally about the success or otherwise of Abenomics. The question almost inevitably focuses on the real side of the economy. This is a mistake. The problem with Japan is not the real economy but the nominal one. Let us first look at the real economy. That has been growing over the last 20 years, albeit slowly at about 0.8%pa. After allowing for working population decline, this works out at about 1.5%pa per head, not brilliant but not bad either, and slightly below the G7 average. This is hardly the stuff of crises. The problem for the real economy has been investment spending which has declined from 27% of GDP in 1995 to 20% now. If, say, that percentage had been maintained, real growth would have been 1.1% pa. But real investment had to fall; at 27% of GDP, it was too high and for the other 6 members of G7 it is under 20%. The decline in investment spending has been an important structural headwind for the economy. In comparison, real consumption has grown slightly faster than the overall economy, at 0.9%pa, and helps to explain why Japan always looks prosperous when one visits the country that is supposed to be struggling. Now look at the nominal economy. The problem is that it is more or less unchanged over the last twenty years. Thus with real growth of 0.8%, and nominal growth of zero, deflation has been 0.8%. Even with extremely low interest rates, zero nominal growth makes it impossible to service the debt burden. As with the real economy, consumption is not the problem as it has risen by 0.3%pa over the period. As with the real economy, it is investment which has fallen by 1.1%pa. The trade account also has not helped. The rise in the yen has forced exporters to cut prices and the rise in the oil price effectively makes it more difficult to service debt costs. Thus the question we need to ask is whether Abenomics has succeeded in increasing nominal GDP growth, and the answer to that is a qualified yes. It has to be qualified because we are only looking at three years of data, which is too short a time period to reach any real conclusions. What we are looking for is both positive nominal growth and one that is greater than the real rate and that is what we have had. Over this short time period, nominal growth has been 1.1%pa compared to real growth of 0.3% implying inflation of 0.8% and roughly the same applies to the subsectors of the economy, most notably exports which has seen nominal growth of over 8%pa over the three years and real growth of 4.0%. The key of course is the fall in the yen, the most significant consequence of Abenomics. This is not a trade war; real imports have risen by 4.7% and net trade has made zero contribution to either real or nominal growth. In addition to the short time period, the other problem has been the battle over the consumption tax, the rise of which last year came close to derailing the whole project. The increase was misjudged; Japan’s problem at the moment is not excess debt but deflation. The time to solve the debt problem will be when the economy is growing in nominal terms. Despite this, the evidence is that Abenomics has successfully changed the dynamics of the Japanese economy, primarily through the decline in the exchange rate.