- The Japanese economy has been in a state of stagnation since 1990, and COVID-19 has exacerbated the problem.
- The recovery from the COVID-19 epidemic in Japan is still incomplete, and maintaining it will be crucial.
- Japan’s reliance on China as a platform for its manufacturing investments has been underlined by supply chain concerns, growing labor costs, and political issues.
- Japan’s social security system is under strain due to a low birthrate and an aging population, as well as labor shortages.
Why has Japan’s economy shrunk?
Japan’s economy as a whole is still recovering from the effects of the 1991 financial crisis and the subsequent lost decades. It took 12 years for Japan’s GDP to return to pre-crisis levels. Japan has also fallen behind in terms of output per capita, which is a further symptom of economic malaise. Japan’s actual output per capita was 14 percent higher than Australia’s in 1991, but by 2011, it had fallen to 14 percent below Australia’s levels. Japan’s economy has been outpaced not only in gross output but also in labor efficiency over the last 20 years, despite the fact that it was formerly a global leader in both. Japan’s worker productivity was the lowest among the G7 developed economies and among the OECD countries in 2018.
Japan has undertaken economic stimulation in response to chronic deflation and sluggish growth, resulting in a fiscal deficit since 1991. These economic stimulus have had unclear impacts on the Japanese economy at best, and have led to the Japanese government’s massive debt burden. As of 2013, Japan had the highest level of debt of any country on the planet, with a debt-to-GDP ratio of 240 percent. While Japan is an outlier in that the vast majority of its public debt is held in the domestic market and by the Bank of Japan, the sheer amount of the debt necessitates hefty service payments and is a concerning sign of the country’s financial health.
Japan was still facing the effects of Lost Decades more than 25 years after the first market crisis. Several Japanese policymakers, on the other hand, have undertaken changes to address the country’s economic doldrums. After Shinzo Abe was elected Prime Minister of Japan in December 2012, he launched the Abenomics reform program, which aimed to address many of the issues presented by Japan’s Lost Decades. His “three arrows” of reform are aimed at addressing Japan’s perennially low inflation, declining worker productivity in comparison to other developed countries, and demographic concerns brought on by an aging population. Investors reacted positively to the reform announcement at first, with the Nikkei 225 rallying above 20,000 in May 2015, up from a low of roughly 9,000 in 2008. Although initial accomplishments were limited by a sales tax hike adopted to balance the government budget, the Bank of Japan has established a 2% objective for consumer-price inflation. Wages and consumer mood, on the other hand, were little affected. According to a Kyodo News poll conducted in January 2014, 73 percent of Japanese respondents had not directly noticed the effects of Abenomics, only 28% expected a wage boost, and over 70% were considering cutting back on spending as a result of the consumption tax increase.
The impact of the nation’s coronavirus epidemic, according to Jun Saito of the Japan Center for Economic Research in 2020, dealt the “final blow” to Japan’s long-struggling economy, which had resumed moderate development in 2018.
What caused Japan’s stagnation?
For nearly two decades, Japan’s economy has been stagnant. Takeo Hoshi will present the conclusions of a report he co-authored with Anil Kashyap of the University of Chicago Booth School of Business, the National Bureau of Economic Research (NBER), and the Federal Reserve Bank of Chicago at this event. Hoshi and Kashyap used the neoclassical growth model in their paper to try to understand why growth has slowed and to offer policy options that could help restore growth. Their focus was purposefully on longer-term difficulties, rather than the acute challenges connected with the global recession’s aftermath.
They discovered that towards the end of the 1970s, Japan could no longer rely on an undervalued currency to increase its exports due to financial globalization and the collapse of the fixed exchange rate regime. To adapt with globalization and minimize its dependency on external demand, it had to reorganize its production system and other economic institutions.
Japan’s population was changing, and it was growing more old. The labor force grew more slowly as the population grew older. Domestic savings that sustained economic expansion during the period of high economic growth were finally diminished as a result of declining fertility mixed with aging.
Finally, both monetary and fiscal policies failed miserably. The Bank of Japan has frequently failed to meet its inflation target. During the 1990s and 2000s, the government sought enormous fiscal stimulus, to the point where Japan’s debt position deteriorated from best to worst among advanced nations.
Hoshi is a Pacific Economic Cooperation Professor of international economic relations at the University of California, San Diego’s Graduate School of International Relations and Pacific Studies. He also serves on the board of directors of Union Bank and is a research associate at the Tokyo Center for Economic Research. His primary research focus is on financial aspects of the Japanese economy, particularly corporate finance and governance.
He won the Reischauer International Education Award in 2011, the Enjoji Jiro Memorial Prize in 2006, and the JEA-Nakahara Prize in 2005. Corporate Financing and Governance in Japan: The Road to the Future (MIT Press, 2001), which won the Nikkei Award for the Best Economics Books in 2002, is one of his many writings. /* Style Definitions */ table.MsoNormalTable Normal0falsefalsefalseEN-USJAX-NONE
Why is the Japanese economy expanding?
Falling coronavirus cases boosted consumption in the final three months of 2021, but rising raw material costs and an increase in Omicron variant infections cast doubt on the prognosis.
Increasing tensions in Ukraine, according to Bank of Japan Governor Haruhiko Kuroda, pose a new risk to the central bank’s prognosis for a moderate economic rebound.
The world’s third-largest economy grew by an annualized 5.4 percent in October-December after declining by a revised 2.7 percent the previous quarter, according to government statistics released on Tuesday, falling short of a median market projection of a 5.8% growth.
According to some economists, the economy will continue to contract in the current quarter as mounting COVID-19 cases discourage consumers from spending and supply chain disruptions crimp industry output.
“Depending on how the Omicron variation affects service-sector demand, the economy would likely halt or even decrease in January-March,” said Takeshi Minami, chief economist at Norinchukin Research Institute.
Private spending, which accounts for more than half of Japan’s gross domestic product, increased by 2.7 percent quarter on quarter, driving economic development (GDP).
What is the state of Japan’s economy?
Japan has been suffering from deflation and poor development since the 1990s, despite being the world’s fourth largest economy (as assessed by purchasing power parity). Low pricing, expensive imports, and a high debt-to-GDP ratio were not addressed by Shinzo Abe’s “Abenomics.”
Why is Japan’s economy performing so well?
Japan has one of the world’s largest and most sophisticated economies. It boasts a highly educated and hardworking workforce, as well as a huge and affluent population, making it one of the world’s largest consumer marketplaces. From 1968 to 2010, Japan’s economy was the world’s second largest (after the United States), until China overtook it. Its GDP was expected to be USD 4.7 trillion in 2016, and its population of 126.9 million has a high quality of life, with a per capita GDP of slightly under USD 40,000 in 2015.
Japan was one of the first Asian countries to ascend the value chain from inexpensive textiles to advanced manufacturing and services, which now account for the bulk of Japan’s GDP and employment, thanks to its extraordinary economic recovery from the ashes of World War II. Agriculture and other primary industries account for under 1% of GDP.
Japan had one of the world’s strongest economic growth rates from the 1960s to the 1980s. This expansion was fueled by:
- Access to cutting-edge technologies and major research and development funding
- A vast domestic market of discriminating consumers has given Japanese companies a competitive advantage in terms of scale.
Manufacturing has been the most notable and well-known aspect of Japan’s economic development. Japan is now a global leader in the production of electrical and electronic goods, automobiles, ships, machine tools, optical and precision equipment, machinery, and chemicals. However, in recent years, Japan has given some manufacturing economic advantage to China, the Republic of Korea, and other manufacturing economies. To some extent, Japanese companies have offset this tendency by shifting manufacturing production to low-cost countries. Japan’s services industry, which includes financial services, now accounts for over 75% of the country’s GDP. The Tokyo Stock Exchange is one of the most important financial centers in the world.
With exports accounting for roughly 16% of GDP, international trade plays a key role in the Japanese economy. Vehicles, machinery, and manufactured items are among the most important exports. The United States (20.2%), China (17.5%), and the Republic of Korea (17.5%) were Japan’s top export destinations in 2015-16. (7 per cent). Export growth is sluggish, despite a cheaper yen as a result of stimulus measures.
Japan’s natural resources are limited, and its agriculture sector is strictly regulated. Mineral fuels, machinery, and food are among Japan’s most important imports. China (25.6%), the United States (10.9%), and Australia (10.9%) were the top three suppliers of these items in 2015. (5.6 per cent). Recent trade and foreign investment developments in Japan have shown a significantly stronger involvement with China, which in 2008 surpassed the United States as Japan’s largest trading partner.
Recent economic changes and trade liberalization, aiming at making the economy more open and flexible, will be critical in assisting Japan in dealing with its problems. Prime Minister Abe has pursued a reformist program, called ‘Abenomics,’ since his election victory in December 2012, adopting fiscal and monetary expansion as well as parts of structural reform that could liberalize the Japanese economy.
Japan’s population is rapidly aging, reducing the size of the workforce and tax revenues while increasing demands on health and social spending. Reforming the labor market to increase participation is one of the strategies being attempted to combat this trend. Prime Minister Shinzo Abe’s ‘Three Arrows’ economic revitalisation strategy of monetary easing, ‘flexible’ fiscal policy, and structural reform propelled Japan’s growth to new heights in 2013.
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Why is Japan so indebted?
The Japanese public debt is predicted to be around US$12.20 trillion (1.4 quadrillion yen) as of 2022, or 266 percent of GDP, the largest of any developed country. The Bank of Japan holds 45 percent of this debt.
The collapse of Japan’s asset price bubble in 1991 ushered in a long period of economic stagnation known as the “lost decade,” with real GDP decreasing considerably during the 1990s. As a result, in the early 2000s, the Bank of Japan embarked on a non-traditional strategy of quantitative easing to inject liquidity into the market in order to promote economic growth. By 2013, Japan’s public debt had surpassed one quadrillion yen (US$10.46 trillion), more than twice the country’s yearly gross domestic product and already the world’s highest debt ratio.
Japan’s public debt has continued to climb in response to a number of issues, including the Global Financial Crisis in 2007-08, the Tsunami in 2011, and the COVID-19 epidemic, which began in late 2019 and has consequences for Tokyo’s hosting of the 2020 Summer Olympics. In August 2011, Moody’s downgraded Japan’s long-term sovereign debt rating from Aa2 to Aa3 due to the country’s large deficit and high borrowing levels. The ratings drop was influenced by substantial budget deficits and government debt since the global recession of 2008-09, as well as the Tohoku earthquake and tsunami in March 2011. The Yearbook of the Organisation for Economic Co-operation and Development (OECD) noted in 2012 that Japan’s “debt surged above 200 percent of GDP partially as a result of the devastating earthquake and subsequent reconstruction efforts.” Because of the growing debt, former Prime Minister Naoto Kan labeled the issue “urgent.”
What accounts for Japan’s low interest rate?
Central banks enforce artificially low interest rates for two reasons. The primary motive is to entice people to borrow, spend, and invest. Modern central banks believe that savings are harmful unless they are rapidly converted into fresh corporate investment. The central bank wants you to take your money out of savings accounts and spend or invest it when interest rates drop to near zero. The cyclical flow of income concept and the paradox of thrift are used to support this claim. Negative interest rates (NIRP) are a last-ditch effort to stimulate consumption, investment, and moderate inflation.
What causes Japan’s low inflation?
Rising producer costs have not yet filtered through to consumer prices, owing to entrenched expectations built up over decades of low or no inflation. Import price rises are notoriously difficult for domestic businesses to pass on to consumers. At a news conference in October, Bank of Japan Governor Haruhiko Kuroda blamed this hesitancy on habits developed during the country’s recurring periods of deflation. Companies have a compelling motivation to oppose hikes. Kikkoman, a soy sauce manufacturer, announced a 4-10 percent price rise starting February last week. In America, such an event might go unnoticed. However, it became national news in Japan.
Another important reason is Japan’s sluggish consumer recovery. The third quarter of the year saw a drop in private spending, which is now 3.5 percent lower than it was at the end of 2019. In Japan, spending on durable goods, which accounts for majority of the country’s inflation, has been virtually unchanged over the previous eight years.
The second paragraph is right; Japan’s low inflation is due to a lack of consumer spending. (While I prefer to concentrate on NGDP, the two aggregates tend to move in lockstep.)
Low inflation is unavoidable in Japan due to the lack of NGDP growth. The rumored “Firms’ “reluctance” to raise prices (stated in the first paragraph) has no bearing on Japan’s low inflation. It’s a mistake to mix together causes with symptoms. (On the other hand, in America, people complain about “price gouging” by oil firms, which is also false.)
It is theoretically feasible that enterprises’ hesitation to raise prices will result in decreased inflation, at least temporarily.
Assume the BOJ raises Japanese NGDP at a rate of 5% per year for the next few years.
If Japanese companies refused to raise prices, real GDP would rise at a rate of 5% each year.
However, at some point, you will run out of workers, and the rate of increase in real output will be unable to continue.
However, this is not the case in Japan, where NGDP growth has been minimal since the late 1990s.
The lack of Japanese inflation since 1996 can be explained entirely by slow NGDP growth (i.e. tight money).
There’s nothing left to explain from Japanese firm pricing behavior after accounting for near-zero NGDP growth.
PS. Take a look at the graph again.
It displays NGDP levels rather than growth rates.
This graph is one of the most perplexing in the history of modern macroeconomics.
By the way, Japan’s overall population in 2020 will be roughly the same as it was in 1996, implying that per capita NGDP will remain unchanged.
Imagine not getting a raise for the next quarter-century!
(In actual terms, Japan has done OK, but in comparison to countries like the United States, Australia, and Germany, its performance has been a bit disappointing.)
Is Japan’s military underdeveloped?
Japan is now placed fifth in the world in terms of overall military might, after the United States, Russia, China, and India, and its defense expenditure is ranked sixth in the Global Firepower rating site’s 2021 list of 140 countries.
Is Japan’s economy superior to America’s?
The two greatest national economies in the world are the United States and Japan. The United States has the highest deficit and indebted country in the world. Japan is the world’s biggest creditor and surplus country. The dollar-yen exchange rate has fluctuated wildly, rising from 360:1 in 1971 to 80:1 in early 1995 before falling to around 130:1 now. Over the last three decades, trade frictions have jeopardized the global trading system’s stability, leading to drastic measures like America’s import tax in 1971 and Japan’s acceptance of “voluntary export limitations” in a wide range of industries in the 1980s. As a result, the direction of economic relations between the United States and Japan is crucial to the global economy as well as to overall relations between the two countries.
Over the last decade, the economic situations of Japan and the United States have substantially shifted. Most Japanese and many Americans believed, in the late 1980s, that Japan was on its approach to becoming the world’s dominating economy, if it hadn’t already done so. The majority of Americans and many Japanese believed that the United States’ competitive position had deteriorated significantly. Japanese investors were pouring money into the US in large amounts (at what often turned out to be vastly inflated prices). As they tried to regain their own strength, American businesses were adopting fundamental Japanese management principles.
All of this has altered in the last ten years. The United States has now experienced economic growth for the ninth year in a row. Since 1970, America has added approximately fifty million new jobs, including twelve million since 1993. Unemployment has dropped to its lowest level in nearly three decades. Since the first oil shock in 1973, prices have been more stable than they have ever been. Indeed, the United States has risen continuously since 1982, with the exception of a brief recession in 1990-91. The “American model” appears to be gaining traction and is being widely imitated around the world.
Since the early 1990s, Japan, on the other hand, has been the “sick man” of both the industrialized world and East Asia. This performance is a curious contradiction. Japan had been the world’s fastest expanding economy before the recent Asian crisis erupted. Even before the newest moves, it has executed fiscal stimulus programs totaling more than $600 billion in previous years. For a long time, interest rates have remained near zero. The trade surplus is the greatest in the world, and it has been steadily increasing in recent years.
Japan, on the other hand, has had essentially no growth in the last six years. Something appears to be fundamentally incorrect. Many areas definitely require deregulation and liberalization, especially as other countries rapidly open their economies. The financial system’s vulnerability is the most significant; recovery is difficult without serious reform in that sector.