During twenty-plus years of economic underperformance, policymaking in Japan earned itself a (largely deserved) reputation for both its caution and its incompetence. Japan became an object-lesson in how not to run an economy. That was, of course, until a reinvigorated Shinzo Abe took the helm as Japan’s Prime Minister for the second time. His first two ‘arrows’ – monetary and fiscal stimulus – have transformed the near-term economic outlook in Japan. The first half of the year saw the Japanese economy expand at an annualised rate of almost 4%, twice the rate seen in the US. And data overnight indicated that the recovery remained alive and well in the second half of the year. The latest Tankan was predictably upbeat, suggesting ongoing improvement in business conditions across all sectors in Q3. The headline indicators for large manufacturers and non-manufacturers both rose to their highest levels since Q407, the former by 8pts on the quarter to 12, the latter by 2pts to 14. Both indicators, meanwhile, are expected to remain elevated in Q4 too. Firms also revised up their expectations for sales and (very significantly) profits in FY13. And while there was no upward revision to investment plans, firms continue to anticipate capex spending to rise a little more than 5% this year, up from 2.2% growth in FY12.

With growth so much stronger, underlying inflationary pressures continue to build. Given the importance of getting wage growth in positive territory if deflation is to be definitively beaten, the tightening in labour market conditions reported in the Tankan, and also apparent in a further rise in the job-to-applicant ratio close to parity, was particularly notable.

So, thanks in large part to the more vigorous and competent economic policymaking framework put in place by Shinzo Abe, an end to 16 years of deflation looks to be tantalisingly close for Japan. And the marked improvement in the economic backdrop is also allowing Abe to start to tackle Japan’s fiscal shortcomings. With the Tankan confirming the positive momentum in the economy, he confirmed that the consumption tax will be raised by 3ppts to 8% from next April in a first step to place the public finances on a more sustainable footing. He also announced that the government is compiling a ¥5trn of programme stimulus measures to help cushion the economic impact – a pragmatic approach that delivers a long-term improvement in the government’s tax receipts with one-off measures to bolster growth. In marked contrast to 1997 when the consumption tax was last hiked, the economy should just about be strong enough to absorb the shock.

Japan’s economy therefore looks to be firmly on the road to redemption, triggered by uncharacteristically decisive and strong political leadership in Tokyo. That, however, only serves to highlight the increasing dysfunctionality of the political events in Washington DC and the threat these pose to the US recovery.

Faced with an economy that continues to struggle to gain traction, in no small part thanks to the fiscal tightening that resulted from the spending cuts embedded in the sequestration earlier this year, the failure of US politicians last night to resolve their differences over Obamacare and shut down the government has merely added further unnecessary pressure on growth. While the direct effects of the shutdown should be fairly limited, assuming that it is short-lived, the impact on already fragile confidence may prove much more significant. And this is compounded by the fact that this is just one of the hurdles facing Congress through the remainder of this year where fiscal policy is concerned. Even if agreement on re-opening the government can be reached quickly, a budget still needs to be negotiated (the current spat is merely about keeping the government open, not a budget for the fiscal year starting today). All the while, the debt ceiling deadline of 17 October looms ever closer, fuelling further uncertainty. Add to that the continued speculation about the next Fed Chairperson, again a subject that has recently found itself at the centre of some particularly ferocious partisan arguments, and the US political system seems to be doing all it can to undermine the recovery.

None of this is to say that US economic policymaking is set to reach the lows seen in Japan over recent years – the Fed at least has shown its level-headedness by not tapering when the door was wide open for it to do so. But the experience in Japan over the past year or so demonstrates the power politicians have to determine the economic fortunes of their respective countries. And the longer Congress fails to deliver greater certainty over the future path of fiscal policy, the longer it will be until normality returns to the US economy.

Grant Lewis, Head of Research