Economic Turmoil of Japan-Free-Samples for Students-Myassignment

Question: Write a report on the present Economic Turmoil of Japan. Answer: Introduction Japan is one of the largest economies next after United States and China. The sound technological base helped the nation to grow at a rapid pace. However, after 1990s the economy started experiencing a troublesome economic scenario. The report aims to portrait the current economic picture in Japan. Japan had undergone through a steady deflation for several years. The situation became even worse after the global financial crisis in 2008. The economy has been put to a recession. The recession could become depression unless some major policy changes occurred in the economy. In this context, Abenomics policy in Japan focused particularly. The policy is a combination a different policies that are essential for economic growth of nation. The policy has been implemented in 2013 following the election of Shinzo Abe as the Prime minister of Japan. The central bank of Japan has also taken the desired strategies to support the designed policy. Both fiscal and monetary boost has been given to the economy. Reforms have been made to restructure some major sectors. Despite severe efforts, the policy has failed to give fruitful result. Japans economy is still undergoing with fluctuation in different aspect. This put question on the designed policy. The essay proceeds with a brief analysis of economic background of Japan to understand the rationale of this policy. The economic condition prevailing in Japan is particularly analyzed and some possible recommendations are made. Discussion Economic background and Abenomics policy in Japan The decade of 1980s is considered as the period of significant economic growth for Japan. The downturn started from 1990s and is continuing until today. The asset prices fell to a significant lower level. Even the bank of Japan had nothing as it stuck with a considerable low level of nominal interest. The economy was undergoing with a period of recession. The final hit the economy received was after the global financial crisis. The economy then needed serious reforms to overcome the situation (Hausman and Wieland 2014). In 2013, a new policy named after the prime minister of the nation Shinzo Abe was designed to rescue the economy from the ongoing crisis. The policy aimed at replenishing the economy from every possible aspect. An expansionary fiscal policy along with stimulatory monetary policy and structural reform policies were undertaken simultaneously (Business Insider, 2017). Stimulatory monetary policy The highest monetary authority of the nation (central bank) implements monetary policy. At times of inflation, money supply is contracted (Gal 2015). On the other hand, during economic contraction, the liquidity flow in the economy is increased .The stimulatory monetary policy is expected to work by reducing the real interest rate. When interest rate pushes down then investment will increase which increases the aggregate demand in the economy. A rightward shift in aggregate demand curve increases the output and income of the economy. This can be explained diagrammatically: Figure 1: AD-AS model showing easy monetary policy In the above figure AD is the aggregate demand curve and AS is the aggregate supply curve. When aggregate demand curve shifts from AD to AD1 the total output shifts to the right. This is what is expected to happen for Japans economy. An additional effect of this policy is depreciating Japans currency. Currency depreciation has a direct effect of boosting export. This increases net export and hence increases the GDP of the nation. Expansionary fiscal policy The expansionary fiscal policy is undertaken by raising the government expenditure in different sphere. Here, the government had planned to increase its spending to 25 trillion from previously accounted 19 trillion (Yoshino and Taghizadeh Hesary 2014). The additional government spending is allocated in improving the infrastructure of the nation. For example, funds have been allotted for easing transport and communication. Increase in government expenditure has a similar effect as explained in figure 1. It raises the aggregate demand and thus raises aggregate output. Structural reform It is the most important component of the designed policy. Expansionary fiscal and monetary policies have a short run impact by expanding aggregate demand in the economy. Structural reform policies aimed at improving the growth potential of the economy. In this time the public debt in the economy amounts to nearly 200 percent of GDP. The effects of monetary and fiscal policies are crowded out because of the intervention of goods and money market. Hence, the problem of deflation cannot be solved using the tools of monetary and fiscal policy alone. Reform is prescribed in the areas of employment generation, environment protection, health/medical care and other major socio economic areas (Haidar and Hoshi, 2015). The Abenomics policy in Japan is expected to work through these three channels. However, the result comes out somewhat different. Impact of Abenomics Policy In the beginning, Prime Minister Shinzo Abe increased the government spending to 10.3 trillion as promised. Bank of Japan was also put under severe pressure to set the targeted inflation at 2% and provide a monetary base of 270 trillion. As per structural reform is concerned some important sectors in the economy have been liberalized. Reforms were taken in agriculture and energy sectors. The initial impact was quite satisfactory. The economy was growing at a rate of 2.4% at the first quarter of 2014 (Hayashi 2014).However, economic turmoil began when government increased business and consumption tax for funding the expenditure. This prohibited economic growth for the next two quarters. Devaluation of currency though led to export expansion and hence made business profitable but output did not increase that much as expected. Another pressure came from decreasing share of working age group in the population. Because of simultaneous problem at the same time, the economy again fell back to the phase of recession. Challenges that Japans Economy faces After commencement of Abenomics policy, the economy is showing a mixed impact. In the year 2015, the economy contracted by 0.8% for the first two quarter. However, in the third quarter data showed 1% rise in GDP. Thus, the economy is highly unstable. Within the last three years, the economy is expanded in some quarters and contracted in others (Patrick 2014).The instability resulted from different factors. Some factors are economic while some are analytical. The mismatch between the predicted output and actual output leads to gap in expectation and results in premature growth. Gross Domestic Product in Japan Gross Domestic Product (GDP) is the monetary value of all goods and services produced within the boundary of the nation (Bodie 2013). The expression for GDP is given as: Y = C + I + G + (X M) Y: GDP of the nation I: Investment G: Government expenditure (X-M): Net Export; where X denotes export and Y denotes import. An increase or decrease in any component leads to the increase or decrease in GDP. In Japan rise in GDP in the first two quarters of accounting years (2015) are contributed by an increase in the Government expenditure. Taxation is the only source of government revenue. In order to fund the additional expenditure government raises the tax imposed on household and business. An increase in income tax reduces the disposable income available in peoples hand. This reduces individual consumption. In Japan, contraction of household consumption reduces the GDP in some quarters (Harari 2013). Another reason for declination in consumption is the expectation of people regarding the price. The ongoing deflation encouraged people to postpone their current consumption with a hope that price will increases further. However, this reduced consumption has a positive impact of raising saving and hence investment. Thus, these two opposite forces made GDP highly volatile. Depreciation of Yen In the past few years, Japans currency depreciated with respect to its major trading partners (Shimizu and Sato 2015). Currency depreciation is positively co-related with export expansion. Goods produced in domestic markets become cheaper in the foreign market. This creates additional demand for goods and services. With export boost the net export term in GDP expression raises which in turn increases the GDP. In the market for foreign exchange, there will be excess supply of foreign currency. This can be explained using the following diagram: Figure 2: foreign exchange market and depreciation of currency In the above figure, DD is demand curve for foreign exchange and SS is the supply Curve. The equilibrium exchange rate is at e*. When there is a depreciation of currency the exchange rate will show an upsurge. The supply of foreign exchange will exceed its demand creating an excess supply situation. The additional foreign currency will be coming from additional export. With this expectation, the central bank of Japan devaluated its currency. In the first few quarters, result was positive. However, given the structure of Japans economy this result failed to continue in the long term. A related consequence of depreciating currency is making imports dearer (De Grauwe 2016). Thus for an import dependent country like Japan the increasing cost of import may offset the resulted gain from export. This is precisely what happened to Japan. Japan has to import energy, food and some industrial raw material from other countries. Following destruction of nuclear plants due to earthquake and tsunami, hit import demand went even higher causing a trade deficit (Kriesler and Halevi 2016).The net export became negative and this reduced GDP in the following quarters. Demographic Transition in Japan A major problem in Japan is coming from the current demographic trend (Ezeh, Bongaarts and Mberu 2012).The population growth has almost stopped like most of the Asian countries. In the existing population the share of aged person is rising. This increases the proportion of dependent population. Consequently, the decline in numbers of people of working age group decreases the effective supply of labor force. With a rise in life expectancy and decrease in birth rate, the demographic dividend is putting a more severe economic threat. In other countries, this problem is partially offset by the increasing number of immigrant. In Japan the immigrants percentage in also low (Docquier, Ozden and Peri 2014). Increasing dependency ratio has a direct impact on saving investment identity in the economy. People tend to save more to have a secured retired life. This is the reason why the higher saving rate in Japan has failed to match with investment stimulus. Lower investment means lower demand for bank loans. A combination of increasing deposit flow from the household and investment downturn in Japan results in a financial instability (Baxa, Horvth and Va?ek 2013). With increasing average age of the population government spending for transfers payment like pension or social welfare cost increases. This put a serious burden on government budget leading to high fiscal deficit for the upcoming years. Bank of Japan Strategies The Bank of Japan (BOJ) has come forward to overcome major economic challenges. To increase demand in the economy the bank has taken negative interest rate policy. In any economy, commercial banks deposit their unutilized cash to the central bank in return of a minimal interest rate. At times of negative interest rate, central bank imposes a fee on this deposited amount. Therefore, it is better for the banks to lend more money and deposit less (Woodford 2012).The banks then ease lending facilities. More lending means more investment and more investment means more output and hence higher growth. This is how the policy of negative interest rate supposed to work. The policy is taken for the first time in Japan following the economic turmoil faced by the nation. In the first quarter of the year, the central bank in Japan has announced that banks have to pay 0.1% of their reserve as fee to BOJ (Soble, 2017). The Tokyo Stock Price Index is facing huge losses making the stock exchange market volatile. On the other hand, the domestic currency has regained its value against dollar (Shioji 2015). There is no stimulatory force in the economy that can pick up the GDP .This is the major cause of concern for the economist. The economist forecasted an upcoming recession for the economy that can be greatest ever the economy faces. The slowdown of Chinas economy has hurt the profit prospect of some big company in Japan (Eichengreen, Park and Shin 2012).For example; Panasonic crop has cut its profit expectation following a decline in sells of electronic devices in China. Hitachi Ltd. has also followed the same trend. Recommendation The root of volatile economic condition in Japan is mainly due to the lack of current demand (Fernndez-Villaverde, Guerrn-Quintana and Rubio-Ramrez 2014).There is a vicious circle of deflation. Lower demand reduces inflation expectation and again ongoing deflation push down present demand by shifting consumption to the future. A major investment is required to break this circle. One way to achieve this is to set a promising inflation target. Then, borrowers will be interested to borrow at present as future inflation benefits borrowers by reducing the real interest rate. On the other hand, if there is possibility of price hike then household will shift some future consumption to the present. Increase in consumption and investment can together boost GDP of the nation. The import dependency of the nation has to be reduced to cut down the import cost. Agricultural sector needs protection to make the nation independent of imported food. Restructuring of destroyed nuclear plant is necessar y to meet the energy requirement of the nation. There is little scope of improving demographic dividend of the nation. What is possible is to reduce the burden of dependent population on those who are working. This can be done by encouraging woman employment in different sectors. Training for skill improvement for women is required to achieve this goal. To increase the strength of the labor force immigrants should be attracted in the economy. Conclusion To sum up, it can be said that the policy adapted by BOJ or the government of Japan has failed to attain the desired result. The volatility continued to prevail in the economy. GDP being an important indicator of economic growth, fluctuating GDP figures indicate uneven growth. Fiscal, monetary and structural reform policies have not work in a convenient way given the structure of the economy. The expansionary fiscal policy has failed to work because of lower private consumption resulted from deflation expectation. Despite having higher saving propensity, investment remains low constituting an exception to macroeconomic saving investment identity. The decision of currency devaluation again went against the GDP. Instead of raising net export, it actually hurt net export by raising the import cost over the export earnings. Japan has to import energy and some industrial raw material from other countries. Not only with respect to dollar but also with respect to the currency of its major t rading partners yen has been devaluated. The import cost thus went to a significant high level. In addition to this, the economy faces challenges from a decreasing youth population. This reduces the strength of the labor force. At the same time with increasing proportion of aged population, the burden on the working population increases. 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