Prime Minister Shinzo Abe said the deflation that wiped out much ofJapan’s growth the past 15 years and so stunted the economy that it slipped to No. 3 behind China, has ended and will be thwarted by new government policies designed to encourage business expansion.

“Through bold monetary policy, flexible fiscal policy and the growth strategy we have reached a stage where there is no deflation,” Abe, 59, said in an interview yesterday at the prime minister’s official residence in Tokyo. With the first sales tax rise since 1997 that took effect in April, “this was an extremely difficult time for management of the economy, but I believe we were somehow able to overcome it.”

Abe was speaking before his cabinet endorsed the most specific measures yet to deliver on his growth strategy -- the third part of a campaign to end declines in consumer prices and stoke investment. The government plans corporate-tax cuts, trade liberalization, reduced barriers for agricultural land consolidation, special zones of lighter regulation and the study of casinos as a way of spurring record numbers of tourists.

The steps are part of Abe’s strategy to restore Japan’s influence in a region where China is the dominant power. A strengthened economy would boost Japan’s appeal to nations from the Philippines to India as a counterweight to China, which caused concern among neighbors pressing its claims on disputed territories.

And:

Abe said that among his policy initiatives he will aim to lower the corporate tax rateto 20 percent to 29 percent over a few years, from about 35 percent now. The rate is currently the second-highest in the Group of Seven, after the U.S., and compares with 23 percent in the U.K. South Korea’s rate is 24 percent.

David Fuller's view

Is this the oldest rule in the markets?  Don’t bet against an aggressive central bank.  If not the oldest, it is certainly one of the best.  Abe’s regime has gone all out to end deflation.  The only thing that could bring it back anytime soon, in my opinion, would be a significant spike in the price of crude oil.  Japan needs to lower its energy costs and safer ‘new nuclear’ would be one important route. 

Japan’s economy would benefit from more tourists, although casinos often attract the wrong kind of visitors, in my opinion.  Nevertheless, casinos would be a big money spinner for the government. 

Many people write Japan off on the basis of its declining population.  This is a problem, for sure, and Japan is unlikely to invite in a significant number of immigrants and give them the right to apply for citizenship after a few years.  However, a programme of female empowerment would certainly boost Japan’s economy.  I have not been to Japan since 1989 but I imagine and certainly hope that Japanese women now have more opportunities to develop high level careers.  If not, a cultural change in attitudes, encouraging more women to pursue careers would certainly strengthen Japan’s economy.

What about Japan’s stock market? 

The recent rally has gone a long way towards offsetting talk of significant top development.  In the short term, the Nikkei 225 and Topix 2^nd Section are temporarily overbought and price action remains volatile.  However, these rallies have reaffirmed the sideways to higher bias.  Only moves beneath the April-May lows, which I do not expect, would challenge the overall recovery hypothesis.