• Japan is hosting G-7 chiefs for the first time since 2008
  • Deflation now stalks economies that were hit by oil spike

The last time Japan hosted the Group of 7 in 2008, contagion gripped the U.S. mortgage market and spiraling food and fuel costs posed inflation risks to the global economy.

A lot has changed since then, with much of the G-7 now on guard against deflation. Japan lost its ranking as the world’s no. 2 economy to China in the interim, and is now more than three years into an ambitious program to spur higher prices and energize growth.

The success of Japan’s revival effort is far from certain, and the nation had to suffer a tsunami, nuclear meltdown and a run of four prime ministers and eight finance ministers before getting a government that was stable enough to try something new.

The G-7, which was in fact the G-8 the last time it came to Japan, has had its own share of turmoil, and in 2014 Russia was forced out over its annexation of Crimea. On May 20 and 21, G-7 finance ministers and central bank chiefs gather at a hot springs resort on the outskirts of Sendai, northern Japan, and a week later leaders fly in for summit in Mie, in the country’s southwest.

As the chart shows, Japan’s economy stagnated over the past eight years, while China’s boomed, more than doubling in size. Even so, China is still outside the G-7 club, which is comprised of the U.S., Japan, Germany, France, Canada, Italy and the U.K.

Things have improved somewhat in the economy since Shinzo Abe became prime minister in December 2012, with gross domestic product expanding 2.7 percent between then and the end of 2015. The progress remains bumpy and GDP has contracted in five of 12 quarters since Abe became leader. There is a risk that data Wednesday may show a sixth contraction.

Core inflation spiked briefly to 3.4 percent in 2014, mainly due to a sales-tax hike, but is now back below zero as the collapse in oil prices undercuts the effects of the Bank of Japan’s massive monetary stimulus. Europe faces similar problems spurring price gains.

The Japanese stock market is about 10 percent lower than it was at the beginning of 2008, and has been on a roller coaster ride that saw it rally thanks to the BOJ’s efforts, until it began falling again late last year. 

While Toyota sits at the top of global rankings for auto companies, much of corporate Japan has under-performed versus rivals since 2008, with the number of companies ranked in the top 100 for market value unchanged at four, according to data compiled by Bloomberg. About half the names on the list are from the U.S., while 11 are now from China.

The yen’s strength this year is increasing the pressure on Japanese exporters, following the tailwind provide by its marked depreciation during the initial years under Abe. The insistence of Japanese policy makers that the nation can intervene in foreign exchange markets if moves become too extreme is likely to get a frosty reception from other G-7 nations.

Although there has been no government intervention in the foreign exchange market since 2011, the U.S. put Japan on a new watch list over its currency practices. It called on Japan to use all policy tools and “not rely excessively on one lever such as monetary policy” to foster the economy.

Japan’s choice of Sendai for the finance chief’s gatherings is designed to highlight reconstruction efforts in the region, which was struck by the massive earthquake and tsunami in March 2011 that killed an estimated 16,000 people.

The location is also a stark reminder of another big change since 2008. While some officials back then recommended increasing nuclear energy amid surging oil costs, there is unlikely to be much talk of this now with crude prices down almost 70 percent and radiation still leaking from the crippled Fukushima power station less than 100 kilometers (60 miles) to the south.

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