There's a corporate profit engine revving up in Japan

Japan’s not-so-great economy has been on analysts’ radars for some time now.

It’s been growing painfully slowly, while the government has accumulated a huge pile of debt.

Most recently, Standard & Poors, one of the world’s biggest credit-rating agencies, even cut Japan’s rating from an AA- to an A+.

(Although that’s still investment grade, the cut suggests that the S&P is flagging major concerns about the economy.)

Even with a lumpy economy, improved efficiency could lead to some good things down the road in Japan, argued Morgan Stanley’s chief investment officer Michael Wilson at a press briefing on Tuesday.

“Japan is quite interesting in our mind because Japan has a cyclical impulse, but also has a potentially structural change with Abenomics, [the government’s] three-prong strategy of monetary policy, fiscal stimulus, and, of course, corporate governance and change at the micro level,” he said.

According to Wilson, that third “arrow” of Abenomics in particular — the structural economic reform —
is “very misunderstood still, under-appreciated.”

As he explained during the event:

“Japan looks a lot like US companies in the 1980’s, where there’s a lot of low-hanging fruit where they can actually generate earnings growth even with very low economic growth because they have under-managed their companies for so long. They’re the worst managed companies in the world — and I can attest to that, too. I have experience in the semi-conductor industry and technology companies in the last twenty years. But that’s changing — slowly! And it’s going to affect change that could take five or ten years down the road.”

In other words, Japanese companies have a lot of room to make their operations more efficient and productive. The subsequent boost to profit margins would translate into profit growth despite stagnant or perhaps declining sales. A few structural tweaks could make a difference over the next several years.

That’s great news as those growing profits eventually make their ways back into the ailing economy.

NOW WATCH: RED EVERYWHERE: It’s a global market meltdown

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.