Japan’s modest recovery is underway, with the EPI score having improved from 85% in 2011 to projected 92.5%, or a B level, in 2016. Exports have started to recover and consumption is regaining its footing, with the labor market slowly improving, leading to a moderate but historically important acceleration in wage growth.

The equity market has been boosted by higher corporate profits, portfolio rebalancing and share buybacks while the financial system’s soundness has broadly improved. GDP growth is projected to accelerate to 1% in 2016, but long-term prospects still remain limited with growth unlikely to be above 1% per annum.

Lack of inflation combined with low GDP growth has been always an issue in Japan, as it was creating a circular stagnation in the economy – the economy could not growth neither in real nor in nominal terms. Still, inflation is expected to increase gradually, following the lagged effect of the recent episode of the yen weakening, combined with the Bank of Japan’s (BoJ’s) accommodative monetary policy. As a result, inflation is projected to rise gradually at about 1.5% per year by 2020.

The 5-Minute Economist projects Japan’s EPI score to improve only gradually in the medium term from its current B level to 91.5%, still B level, by 2020, mainly driven by a decrease in its budget deficit, while GDP growth and unemployment rate are unlikely to change much, despite a gradual pick-up in inflation.