Macroeconomics Of Japan Essay

Japan is the greatest economy in Asia, in terms of GDP, as well as human resources and technology. The nation was once predicted to be the next superpower nation exceeding the United Sates and countries of the European Union. Today, it is the world’s third-largest economy after the United States and People’s Republic of China. It is also the second-largest economy by real GDP and market exchange rates. The economy is highly efficient and competitive especially in the services industry, which is originated from a good cooperation between the government and the industry, a strong work ethic and the mastery of high technology. Recent analysis however, revealed that the economy is currently under serious problems. Observers and even Japan’s own officials have admitted that the economy is no longer ‘first class’. There are even worries that Japan has no longer sustain the capacity to be one of the world’s greatest economies anymore, and the economy will slowly degrade into one of the typical Asian economies. Analysts stated that such an occurrence has happened before, when Argentina which were once considered one of the strongest economies in the world degraded into typical third world economies today. Is this the case with Japan? In this paper I am discussing the problems that stayed within Japan’s economy and elaborating their probable causes. Afterwards, I will elaborate the macroeconomic policies which have been performed by the Japanese government in response to these issues and how these policies have affected the economy. The period of discussion is 1997 -2007, which are the years after the ‘Japan economic bubble’ bursts, to the present day. II. Japan Economic Issues 1997-2007 II. 1. Background of the Issues – Japan Economic Bubble Japanese growth rates have been nothing less than spectacular for decades. In the 60’s the average real economic growth rate was 10%, in the 70’s it was 5% and in the 80’s it was 4%. Japanese financial system however, was based on a bureaucratic fiat. The government believes that by injecting sufficient amount of capital into the market, the economy will experience a rapid rate of growth. Thus, the financial system was set to inject cheap capital into the business sector (Hamada, 2004). In support of this policy, banks even reluctant to report –in bad loans. In short, companies were encouraged to borrow and expand continuously. Companies would then borrow using assets like land and then invest the money into the stock market. After the market rises, the company would have latent profits which will be used to buy more land and therefore, the cycle continues. These cycles were the origins of the huge real estate and stock market bubbles. These bubbles however, cannot be sustained forever, and when the Bank of Japan (BOJ) raised interests rates, the bubble bursts in 1989 and leaving commercial banks in Japan with a mountain of bad loans. II. 2. Stagnant Economic Growth Afterwards, assets prices began to decline rapidly. Japan’s economy was going through a long period of deflation since then, partly caused by the appreciation of yen. Because of this appreciation, the CPI increase rate dropped into negative in 1995. The expanding deflation caused Japan’s economy to remain in a static condition. Moreover, the deepening deflation was accompanied with weakening state of real economy like growth rates declines and increased unemployment rates. Between 1992 and 1994, real growth rates are below 1%. It even dropped toward a negative range in 1998. Jobless rate have also suffered a rise of 3. 4 % from 2 % in 1990 to 5. 4% in 2003. The economic downsizing in 1997 put Japanese economy into a new state of deflation (Oliver, 2002). II. 3. Deflationary Trap It was not considered serious until the inflation rate slipped to below zero in 1997. In this phase, observers believed that Japan was in a ‘deflationary trap’. However, because of various long-term considerations, the government has implemented policies to maintain inflation stable near the zero mark. In this situation however, the central bank cannot use its traditional instruments to deal with the issue. As a result, deflation deepens even further and the market intensified expectations toward further and longer period of deflation. Due to the increase in real rate of interest, consumer spending and corporate investments were discouraged. Unfortunately, the shrinking total demand in the macro economy further worsen the deflation. If not dealt with accordingly, this could lead into self-sustaining deflationary process (Campbell, 1992).