FORTUNE -- The U.S. and the rest of the world have been watching Japan closely. Nearly a year ago, Prime Minister Shinzo Abe launched what has been dubbed "Abenomics," an aggressive plan to revive its economy from a two-decades long slump; the hope is that if Japan turns around, it could, for the first in a long time, lift the global economy.
On Thursday, Japan's economy slowed sharply in the three-month period ended September, as demand from emerging markets fell and consumption at home weakened. The country's gross domestic product, the broadest measure of goods and services produced in the economy, grew at an annualized rate of 1.9%, compared with 4.3% and 3.8%, respectively, during the previous two quarters, the government said.
"Japan cannot rely on exports. We have to pursue domestic demand-led growth," said Finance Minister Taro Aso during a parliamentary session last week. "We didn't expect economic woes in Europe to last for so long, while China's economy has also slowed down to a growth rate of 7% from 8%."
Japan's weaker data on Thursday doesn't suggest Abenomics isn't working, but it does highlight what's missing in Japan's master plan: immigration reform.
In a report released last week, Standard & Poor's global chief economist Paul Sheard said Japan could accelerate the pace of economic growth by letting more foreign workers in. Japan's population has been declining for years. It was at 128.9 million people in 2010 and is set to fall below the 100 million mark in 2048, but Japan has been reluctant to allow more foreigners in and there's hardly any mention of such plans under Abenomics.
To be sure, Japan has made bold moves to end deflation. Years of falling prices have kept wages stagnant or declining, but more and more investors are now convinced that could soon turn around. According to an October survey of 1,000 Japanese retail investors by Goldman Sachs Asset Management, more than half of respondents (56%) said they expect deflation to end soon and prices to start rising moderately, while 21% worry about the risks of too much inflation.
Japan's problems run deeper. Its birth rate, currently 1.39 children per woman, has sunk to record lows. Years of stagnant wages have made Japanese men less attractive to potential partners, and couples have delayed getting married and having children because of economic uncertainties. What's more, the costs and burden of parenthood are high, as there's also a big shortage of public day care centers, especially in cities.
All this translates to a huge shortage of working-age people. Under Abenomics, policymakers hope the country would grow an average of 2% a year over the next decade, compared with an average of 0.8% a year over the previous decade. If that's really going to happen, Japan will need to tackle its declining workforce, Sheard says.
Japan has been trying to raise its birth rate, but even if it successfully did that tomorrow, it will take at least a generation before it solves its demographic problems. A shortcut cure would be immigration reform, Sheard says.
Immigrants grow the population, plus they are more likely to have more children. And allowing more foreigners in could also encourage more women to stay in their careers -- a problem that's plagued Japan for years as women struggle to pursue a career while raising a family. Sheard says a smart immigration policy would ease labor restrictions over childcare facilities, helping to make it easier for working women.
Others have supported this idea, but it remains a deeply touchy topic for Japanese politicians who have opposed bringing in more foreign workers. But depending how Japan's economy fares over the next several years, that idea may not be so far-fetched.
At best, the Tokyo 2020 Olympic games will offer a pleasant distraction from Japan's economic woes. Here's why.Sep 12, 2013 5:00 AM ET
Without China to fuel the engine, Asia's economic racecar looks to be in for a long pit stop.
By Moshe Silver, Hedgeye
FORTUNE -- Right now, Japan's equity markets are being buoyed by the same "Print-And-Spend" policy that the Federal Reserve used to pay off Wall Street, emanating from the same ivory tower that paid untold trillions in bonuses to America's failed bankers. Meanwhile, a motley crew of high-level economists including Ben MOREAug 7, 2013 11:43 AM ET
The noted contrarian investor and long-time manager of the Oakmark International Fund explains why he's still bullish even as the country's stock rally stalls out.
By Katie Benner, writer
FORTUNE--David Herro liked Japanese stocks way back in 2011, when some economists and fund managers were convinced that the country was heading for a financial blowup. He thought many of Japan's companies were producing excellent returns on equity while trading at low MOREJun 18, 2013 12:32 PM ET
Volatility is on the rise, liquidity is getting tougher in certain places, and anxiety is on the rise.
By Mohamed A. El-Erian
FORTUNE -- Those trading in many market segments would have noticed a subtle change last week: Volatility is on the rise, liquidity is getting tougher in certain places, correlations are morphing, and anxiety has increased. Moreover, rather than impact all market segments simultaneously, such dislocations seem to be cascading MOREJun 3, 2013 5:00 AM ET
There's one big winner, too.
FORTUNE -- The "Abe Trade" just hit a major bump.
Toward the end of last year, a number of large hedge funds began piling into Japan. Driving the bet was the country's new prime minister Shinzo Abe, who said he favored flooding Japan's markets with cash from its central bank in order to finally pull its economy out of its perpetual slump. And hedge funds, for all MOREStephen Gandel, senior editor - May 23, 2013 1:35 PM ET
Legendary investor says stock market is in state of "euphoria," while economy is still in the dumps.
FORTUNE -- At least one notable investor thinks we may be in bubble trouble again.
Sam Zell on Thursday at the SALT hedge fund conference in Las Vegas said stocks are due for a fall. The legendary real estate investor thinks the market is out of touch with what is really going on in the MOREStephen Gandel, senior editor - May 10, 2013 9:02 AM ET
Hedge fund manager Dan Loeb says Japanese stocks are cheap.
FORTUNE -- Dan Loeb, the $11 billion hedge fund titan, says he is betting on a Japanese rebound.
Speaking on Thursday at the annual SALT hedge fund conference, Loeb named Japan as the investment he is most excited about right now.
"We are extremely focused on Japan," says Loeb, who runs the Third Point hedge fund.
In a recent investing letter, Loeb mentioned that MOREStephen Gandel, senior editor - May 9, 2013 5:01 PM ET
Japan has repeatedly tried to revive its economy, but investors might just buy it this time around.
FORTUNE – Japan has struggled to keep its standing as the world's third-largest economy. For the past 15 years, it has been plagued by falling prices, making it the only major economy to undergo prolonged deflation since the Great Depression. Over the years, the government has tried to reboot the economy to what it once MORENin-Hai Tseng, Writer - Apr 11, 2013 10:56 AM ET
Even in tough spots like Europe and Japan, MFS International Value Fund's Barnaby Wiener sees stocks that he thinks can deliver.
By Mina Kimes, writer
FORTUNE -- Markets across the globe are in a state of tumult, but Barnaby Wiener, who runs the $5.8 billion MFS International Value Fund (MINIX), isn't breaking a sweat. Wiener (pronounced wee-ner) is a long-term investor who picks stocks on an individual basis, and he thinks the MORESep 13, 2012 5:00 AM ET
|Economy is improving but why doesn't it feel that way?|
|Where should you put your money now?|
|FHA to pull back on big mortgages|
|2 million Facebook, Gmail and Twitter passwords stolen in massive hack|
|Someone bought a $100,000 Tesla with Bitcoins|