Japan Economy Final Project

8/7/2019 Japan Economy Final Project

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Economy of JAPAN

(MACROECONOMICS PROJECT REPORT)

MBA PROGRAM(2010-12)

SECTION-J

Submitted to:

Prof. Jojo Mathew George

Submitted by: GROUP 9

S.No. Name Enrollment No. Seat No.

1. Varun Kohli 10BSPHH010861 46

2. Aayushi Kasliwal 10BSPHH010004 47

3. Nipun Sharma 10BSPHH010476 48

4. Khushboo Gumber 10BSPHH010917 49

5. Saurabh Trivedi 10BSPHH011076 69


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Table of Contents

S.No. Topic PageNo.

1. Introduction 32. Sectoral Analyses 73. Economic Growth, Employment and Inflation

management10

4. External sector (Currency management, NX, Net flow

of funds etc)15

5. Prevailing economic policies

(Monetary/Fiscal/Trade/Currency)19

6. CONCLUSION & OUTLOOK 24

7. References 27


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1.Introduction:

By Aayushi Kasliwal-10BSPHH010004 (Seat-47)

The economy of Japan is the third largest in the world after the US and the Peoples Republic

of China and ahead of Germany at 4th. For three decades from 1960, Japan experienced rapideconomic growth. With average growth rates of 10% in the 1960s, 5% in the 1970s, and 4%in the 1980s, Japan was able to establish and maintain itself as the world's second largesteconomy since 1968, until supplanted by the People's Republic of China in 2010. However,in the second half of the 1980s, rising stock and real estate prices caused the Japaneseeconomy to overheat in what was later to be known as the Japanese Asset Price Bubble.The economic bubble came to an abrupt end as the Tokyo Stock exchange crashed in 1990-92 and real estate prices peaked in 1991. Growth in Japan throughout the 1990s at 1.5% wasslower than growth in other major developed economies, giving rise toThe Lost Decade.

The economic history of Japan is one of the most studied for its spectacular growth for threeperiods. First was the foundation ofEdo (in 1603) to whole inland economical developments.Economic development during the Edo period included urbanization, increased shipping ofcommodities, a significant expansion of domestic and, initially, foreign commerce, and adiffusion of trade. The construction trades flourished, along with banking facilities andmerchant associations.

Second was the Meiji Restoration (in 1868) to be the first non European power. During thisperiod (18681912), leaders inaugurated a new Western-based education system for allyoung people, sent thousands of students to the United States and Europe, and hired morethan 3,000 Westerners to teach modern science, mathematics, technology, and foreign

languages in Japan. The government also built railroads, improved roads, and inaugurated aland reform program to prepare the country for further growth and development.

Third was the defeat of the World War II (in 1945) when the island nation rose to becomethe world's second largest economy. Growth declined markedly in the late 1990s largely dueto the Bank of Japan's failure to cut interest rates quickly enough to counter after-effects ofover-investment during the late 1980s. Some economists believe that because the Bank ofJapan failed to cut rates quickly enough, Japan entered a liquidity trap. Therefore, to keep itseconomy afloat, Japan ran massive budget deficits (added trillions in Yen to Japanesefinancial system) to finance large public works programs. This implied lowering taxes andincreasing G, thus increasing AD.

Post World War II, Japan fought to regain the one-third of its industrial base it had lost in thewar. Japans post war economy developed from the leftovers of an industrial infrastructurethat suffered widespread destruction during World War II. As a result Japan was considered aless developed country with per capital consumption roughly one-fifth of the U.S. Thecountry saw its per capital GNP rise from 276 U.S. dollars in 1950 to nearly 25,000 U.S.dollars in the late 1980s. There are several factors that have lead to this rebuilding andexplosion of the Japanese economy. These factors include Japans widespread use of theindustrial policy, becoming one of the worlds largest creditor nations, and penetratinginternational markets in the car/electronic manufacturing industries.

The industrial policy has been consciously used by Japan for the sole purpose of stimulationof economic growth. Japan became one of the worlds largest and most important iron and


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steel exporters. These two core competencies factored into the growth of the manufacturingindustry. Japan is also the worlds largest producers of machine tools, which are primarily exported to the U.S. and South Korea. Japans technological innovations have enabled thecountry to regain a strong position in the development and construction of large-scalemachinery, automobiles and electronics.

In addition to having to deal with business trends such as deregulation and globalization, theJapanese industry has also been affected by the aging of the Japanese society. Over 16% ofJapans population is 65 or older. Within the next 15 years this figure is expected to be over25%. This factor will increase the tax and social security burden that workers will have tocarry. At the same time it is likely that a decrease in personal savings will result in loweringof overall capital accumulation. These labor shortages will become a limiting factor to thefuture growth potential of Japans economy.

The institutional approach Japan has taken highlights one of the key functions of any sort ofeffective industrial policy. The key function is the gathering and dissemination of accurate

information. No matter how capable and powerful the bureaucracy, policy measures based onincorrect information will not only fail to succeed in their intent, but are likely to have anegative effect on growth. Japan has taken this theory and correctly identified the greatestdanger of the industrial policy and grown from a less developed country to a developedcountry in a matter of four decades.

On November 17, 2008, Japanese government officials announced that the economy was in arecession. It was reported that Japan's economy contracted at an annual pace of 1.8% in thethird quarter of 2008. It is forecasted to have shrunk 0.8% through the fiscal year that endsMarch 2009. In July 2009 unemployment reached a post-war high of 5.7 per cent, accordingto the Japan Times. Although the economy has recovered in 2010, levels of public debtremain high approaching 200% of GDP.

On March 17, 2010 the Bank of Japan moved to boost yen reserves for 3-month bank loans to20 trillion yen, although economists see this as a move merely to please the Democratic Partyof Japan because, as no money is leaving the financial system, there will be no impact onlong term rates in either the ordinary market or the Foreign exchange market. As a result ofthis the foreign press and the IMF believe Japan should be doing more to help its economyrecover.

In August 2010 the yen hit a 15 year high against the dollar in nominal terms. In real

exchange rate terms, however, the yen was still valued at less than its average since 1990.

The following graph shows the GDP Growth rate of Japan over the last 3 years:


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From the graph it can be seen that Japan's gross domestic product grew 0.9% in the July-September period from the previous quarter, or at an annualized pace of 3.9%, up from arevised +0.4%.

The expansion accelerated in the third quarter of 2010 as shoppers bought cars beforegovernment subsidies expired, air conditioners to stay cool in a hot summer, and cigarettesbefore a new tobacco tax kicked in. The result marked the fourth straight quarter ofexpansion.

With the government currently focused on fiscal reconstruction, the chances of additionalfiscal spending are declining sharply. While government purchase incentives for electronic

goods, cars and other products has buoyed spending, the government is unlikely to extend orexpand those programs. Private consumer spending, which accounts for nearly 60% ofJapan's GDP, was flat in the April-June period, compared with a revised 0.5% growth in theprevious quarter. But with these incentives no longer in place, a slowdown already appearsunderway as deflation and the persistently strong yen drag on growth.

Future of Japanese Economy

The Japanese economy has faced difficulties sustaining itself on a recovery track as the

effects of the government's fiscal stimulus measures have weakened, and the trend isexpected to continue in 2011. The key questions over the prospects for the country'seconomy, which has remained stagnant for two decades, are whether businesses will restartspending and consumers will keep their purse strings loose. Business investment, which hasbeen sluggish in Japan since the global financial turmoil in 2008, could make a notableupturn in 2011 due mainly to tax reforms the government endorsed in December.

However, the major upheavals that Japan is facing today are not limited to economicstructural reforms and the renewing of the established systems. Rather, the greatest changelies in the nation's ethics and aesthetics, which are the basis of everything, that is, the basisfor all choices and judgments. Since the Second World War, Japanese society has viewedefficiency, equality, and safety as aspects of "justice." The concept that efficiency is "just" is


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common to all contemporary industrialized societies, and it has been recognized as such inJapan ever since the Meiji era.

Although Japanese society is growing older faster than anywhere else in the world, plenty ofothers are shuffling along behind it. Parts of Europe are ageing fast, and are unwilling to

adapt, as recent protests against rising retirement ages in France and Greece attest. OtherConfucian countries such as South Korea, China and Taiwan, have enjoyed a demographicdividenda rapidly expanding workforce and falling birth ratesimilar to Japans in the1960s to 1980s. With fewer children and elderly to pay for, such countries could ploughsavings back into economic expansion. As in Japan, relatively few women work afterbecoming mothers and even fewer immigrants are let in. Such places will look to Japan forhow to cope with the economic and social consequences when their manpower starts to dryup. At present, for instance, 62% of working women quit their jobs after having their firstchild; less discrimination against them in the workplace would encourage them to go onworking. Retired people could be coaxed back to work, especially if they could claim theirpensions while working. More immigration could help Japan maintain an innovative streak

that it risks losing as its workers age.

The hardest task will be to raise Japans productivity to offset the looming manpowershortage. Deregulation would help, by making it easier to sell services (such as residentialcare) to the elderly, by freeing up finance to allow them to make better use of their savings,and by encouraging more competition in the domestic economy so that it can withstand theinevitable shocks to external trade. Deregulation will also lead to the expansion of domesticdemand and an increase of imports and, as a result, will contribute to correcting the tradeimbalance. Though the effects of deregulation will be seen slowly over time, the importantthing is to build up efforts to dismantle regulations as far as possible, shifting responsibilityfrom the public to the private sector.


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2. SECTORAL ANALYSIS OF JAPANESE ECONOMY

By Varun Kohli-10BSPHH010861 (Seat-46)

PRIMARY SECTOR

Only 12% of the land in Japan is arable, but the per hectare crop yield is one of the highest in

the world. This sector engages about 4% of the total labor force and is highly subsidized and

protected. Japan is self-sufficient in the production of rice. However, it heavily imports

wheat, corn, sorghum and soybeans, mainly from the US. It is the third largest importer of US

food products. Japan is also self-sufficient in producing apples, pears and oranges. Japan is

among the largest producers of fish in the world.

Agriculture, forestry, and fishing form the primary sector of industry of the Japanese

economy,

Together with the Japanese mining industry, but together they account for only 1.3% of gross

national product. Only 12% of Japan's land is suitable for cultivation, but the agricultural

economy is highly subsidized and protected. Agriculture, forestry, and fishing dominated

the Japanese economy until the 1940s, but thereafter declined into relative unimportance. In

the late 19th century (Meiji period), these sectors had accounted for more than 80 % of

employment. Employment in agriculture declined in the pre-war period, but the sector was

still the largest employer (about 50 % of the work force) by the end of World War II. It was

further declined to 23.5 % in 1965, 11.9 % in 1977, and to 7.2 % in 1988. The importance of

agriculture in the national economy later continued its rapid decline, with the share of net

agricultural production in GNP finally reduced between 1975 and 1989 from 4.1 to 3 % In

the late 1980s, 85.5 % of Japan's farmers were also engaged in occupations outside of

farming, and most of these part-time farmers earned most of their income from non farming

activities. Japan's economic boom that began in the 1950s left farmers far behind in both

income and agricultural technology. They were attracted to the government's food control


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policy under which high rice prices were guaranteed and farmers were encouraged to increase

the output of any crops of their own choice. Farmers became mass producers of rice, even

turning their own vegetable gardens into rice fields.

SECONDARY SECTOR

This sector employs about 28% of the total labor force of the country; manufacturing sector

of Japan is widely diversified. Although the manufacturing industry relies heavily on the

import of raw material and fuel, it comprises some of the most successful companies in the

world. The major manufacturing industries of Japan are automobiles, consumer electronics,

computers, optical fibers, optoelectronics, optical media, semiconductors, and iron and steel.

Economic growth is also dependent on petrochemicals, pharmaceuticals, bioindustry,

shipbuilding, aerospace, textiles and processed foods.

One-fourth of Japan's GDP is heavily dependent on imported raw materials and fuels.

Internationally, Japan is best known for its automotive and electronics industries, as the home

of big manufacturers such as Toyota, Honda, Nissan, Mitsubishi, Mazda, Sony, Matsushita,

Toshiba, Nikon, Suzuki and Hitachi. Japan also holds a large market share in high-technology

industries such as semiconductors, industrial chemicals, machine tools, and (in recent years)

aerospace. Construction has long been one of Japan's largest industries, with the help of

multi-billion-dollar government contracts in the civil sector. Robotics constitutes a key long-

term economic strength.

The nation's industrial activities (including, manufacturing, and power, gas, and water

utilities) contributed 50.7% of total domestic industrial production in 2005, up from 45.8

percent in 1975. This steady performance of the industrial sector over the period was a result

of the growth of high-technology industries. During this period, some of the older heavy

industries, such as steel and shipbuilding, either declined or simply held stable.

The fields in which Japan enjoys relatively high technological development include

semiconductor manufacturing, optical fibers, optoelectronics, optical media, facsimile and

copy machines, industrial robots, and fermentation processes.


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TERTIARY SECTOR

This sector is the backbone of the countrys economy, employing 68% of the labor force as of2009. However, the growth was impacted by the 2008 recession. To boost the sector the

Japanese government announced a stimulus package of 7.2 trillion in 2009. Some of the

major service industries in Japan are banking, insurance, telecommunications, transportation,

real estate and retailing.

Japan's economic growth in the 1960s and 1970s was based on the rapid expansion of heavy

manufacturing in such areas as automobiles, steel, shipbuilding, chemicals, and electronics.

The secondary sector (manufacturing, construction, and mining) expanded to 35.6 percent of

the work force by 1970. By the late 1970s, however, the Japanese economy began to move

away from heavy manufacturing toward a more service-oriented (tertiary sector) base. During

the 1980s, jobs in wholesaling, retailing finance and insurance, real estate, transportation,

communications, and government grew rapidly, while secondary-sector employment

remained stable. The tertiary sector grew from 47 percent of the work force in 1970 to 59.2

percent in 1990 and was expected to grow to 62 percent by 2000.

The real estate and retailing are the other most important component of service sector.


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3. Economic Growth, Employment and Inflation management In

JAPAN:

By Saurabh Trivedi-10BSPHH011076 (Seat-69)

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

1953

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

High growth per iod

Sta b l e g r ow th pe r iod No growth per iod

Real GDP Growth

1st Oil Shock

2nd Oil ShockYen floats

Bubble collapses

I) Post-War Growth (1951-1970): After the end of the Second World War, Japanembarked on a journey of rapid industrialization with the support of its financial

institutions, which became the drivers of its growth. Japan introduced the concept of

'just-in-time inventory' and other concepts, which have become the pillars of various

corporations around the world. This is the period in which the Japan had the highestgrowth rate till today after the WW-II. After the war, the Japan got relieved from the military-dominated government which helped it devoting all its resources to reconstruct its lost and

well known industrial capacity. In this period, Japans GDP was growing at a rate of morethan 9%.The main sources of growth were manufacturing and mining, construction and theinfrastructure. 42% of the employment of Japan was in these sectors whereas only 25% of thelabor force remained in the agriculture. Between 1956-60, Japan became the worlds largestship manufacturer and worlds top steel producer and it surpassed the U.K., Italy, Germany and France.

Japans highly acclaimed postwar education system contributed strongly to modernizing thewhole process. Japans high literacy growth rate and well-advanced education acted as themain source for its technologically advanced economy.


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In the mid 1960s, a major step was taken by the Japan. It opened some of its industries tointernational competition. This helped the manufacturing and mining sector to grow at 17%per year between1965-70.

In this era Japan entered into the virtuous cycle featuring demand expansion-production

expansion-increase in income-consumption expansion-further income expansion-increasein savings-investment growth and an expansion of production capacity.

ii) Stable Growth Period (1970-1990): In 1970, Japan integrated itsmanufacturing and service sector to streamline its operation due to which its growth rateevened out to 8%.By 1970s; Japan has the third largest economy in the world. The mainelements of this achievement were its initial focus on certain areas of industry: electronics,automobile, shipbuilding; focus on export and later on consumer goods for domestic market.

Due to the Oil Crisis of 1973, Japan faced its first postwar decline in its growth in this periodtogether with high price inflation. By 1973, a rapid increase in the money supply led to

extensive speculation in the real estate and domestic commodity market. Japan was alreadysuffering from the double digit inflation rate due to the oil crisis. Japan faced large fluctuationin the rate of inflation in this era. Inflation peaked at around 25% in 1974.The consequentrecession lowered the GDP growth rate from 10% level to an average of 3.7% in the period of1974-79.The second oil crisis in 1979 forced the Japan to a fundamental shift in its industrystructure from emphasis on heavy industry(highly oil-dependent) to VLSI semiconductorindustry. Government also responded with the Keynesian stimulus which included massivedeficit spending funded by bond issues. Due to these changes, 1979 Oil Crisis had littleimpact on Japan economy and it start growing at a pace of 5.5% in 1980s.These structuralchanges were not being able to check the slowing of growth rate but helped Japan to face thecrisis in a more comprehensive manner than by the other countries.

The Bubble Economy (1980-90): After the 1985 Plaza Accord, the Yensvalue rose sharply reaching 120 Yen to the U.S. Dollar in 1988-three times its valuein 1971.This consequent increase in the price of Japanese exported goods reducedtheir competitiveness in the overseas market, but the efficient financial measure takenby the government contributed to growth in domestic demand. Land and Asset priceswere rising drastically in the late 1980s.The higher land prices led to higher stockprices which led to equity finance boom. During this period, land prices got doubledand Nikkei Stock market rose by 180%.In May 1989, the Government tightened itsmonetary policies to suppress the rise in the value of assets. However, higher interestrate led the downward spiral of the stock prices. By the end of 1990, the Nikkei Stock

market fell by 38% wiping out 300 trillion Yen in value and land prices droppedsharply from their speculative peak. This push into the recession is known as thebursting of the bubble economy.

iii) The post bubble recession continued through the second half of the 1990s and into thenew millennium. In 1992, the real GNP growth slowed to 1.7%. Even the automobile andelectronics industries that had experienced tremendous growth in the previous 2 to 3 decadesentered the recessionary period in 1992.The domestic market of Japan shrank at the sametime that Japans share of the USAs market declined. Its electronics export was facing a stiffcompetition from the Taiwan, Korea and USA semiconductor products. Until 1990, Japanwas on track to become the number 1 economy of the world. The bubble happens and thebubble bursts but unfortunately for Japan the decline never ended. Between1990-2004, the

average real GDP growth averaged around 1.2%.It almost stopped growing. One of thepossible reasons for this was over dependence on domestic consumption in 1980-90


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which did not increase from more than 2% after 1989.In this period, Japan faced fourpossible identifiable recessions. In hindsight, the Bank of Japan continued too long with itstight monetary policy and did not shift aggressively enough to quantitative easing after 1993,when its policy changed. Regulatory authorities were unwilling to close insolvent financialinstitutions, permit the bankruptcy in the corporate sector and instead adopted the policy of

denial and avoidance. It was quite simply a classic stagflation which is still going on. This,we also know as the lost decade in Japan.

Some temporary improvements were seen in the economy in 1995 and 1996, partly due to thefall in the value of Yen and additional demand generated by the recovery efforts for theJanuary 1995 Great Hanshin-Awaji Earthquake. In 1997, however, a rise in the consumptiontax rate, a reduction in the government investment activities and the bankruptcies of themajor financial institutions quickly worsened the recession. Due to the further tightening ofthe lending by the banks and financial institutions (due to huge volume of bad debtsaggravated by still falling land prices) forced the companies to reduce their investments inplants and equipment. This, combined with falling exports due to the Asian Financial Crisis,

resulted in the lower profit in all its sectors. Employment salaries and wages also fell whichfurther dragged the consumer spending down and in 1998 Japan faced the negative economicgrowth.

Real GDP during the 1990s stagnated. It rose only from 428,827 billion yen in 1990 to469,485 billion yen by the end of 2000.Growth has been negative since 1998.Theunemployment rate increased from 2.1% in 1991 to 4.8% in 2000.As far as worlds standardsare considered, it is not a very high increase in unemployment but in Japans context it isquite significant as this never crossed the mark of 2.8% in the entire history of Japanseconomy.

Japans Deflation:Inflation in Japan was already low in the late 1980s, but it continued to fell further andbecame negative in 1994.Many economist says that this deflation is derived from:

Accumulated bad loans. Huge amount of import of highly cheap Chinese goods. Diminishing growth potential of Japanese economy. Demand shortage.


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Japan has an ageing population (23% of people are above 65 years) that is notgrowing and will soon start a long decline.

Insolvent Companies and Banks.There was absolutely no growth in the nominal size of Japans economy because of deflationduring Japans lost 20 years. It was only Japan which experienced no growth in this period.Real estates prices were falling even when the other countries were seeing a surge in this

sector. This made Japans stagnation even worse.

A decline in the wages despite of the outstanding productivity was the most significantcharacteristics of Japans prolonged period of stagnation. In Japans case, rising productivityallowed the companies to reduce its investment in labor, which caused unemployment to rise.Consumption shrank and the wages fell as the supply of the worker available increased.Deflationary pressure grew as a result. This is precisely what happened in Japan. Otherwiseincrease in the productivity lead to wage hike, increase in demands and ultimately thisprocess creates more jobs.

Japans deflation was harmful to the finance industry and the service sector mainly. It did the

most damage in these 2 sectors. Only the Japans manufacturing sector was able to increaseincome consistently by raising productivity. But due to the yens appreciation manufacturerswere unable to translate the higher earning into the higher salaries for their employees. This ishow falling wages shrank domestic demand and produced a negative cycle in Japan.


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After 2002, Japan economy entered a period of slow but steady growth that continuedthrough the middle of this decade. After a long period of more than 10 years, the negativeafter-effects of bubble economy burst finally appeared to have been largely tackled. Thenon-performing or bad debts ratio of major banks got lowered from 8% in 2002 to 2% in2006 and this has contributed to regain the lost confidence for the banks. The bank came backon track of lending and acts properly as financial intermediaries. Reflecting businessrecovery, the Nikkei Stock rose strongly between 2003 to 2006.However this expansion gotseverely hit by the 2008 financial shock which originated with US subprime mortgage crisis.Japans export, which has been the engine of growth in this period of expansion, again gotdramatically plunged. This again showed the vulnerability Japans reliance on its exportdemand which become very low due to the crisis of 2008. (See Figure)


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4. JAPAN- EXTERNAL SECTOR:

By Khushboo Gumber-10BSPHH010917 (Seat-49)

The economy of Japan is the third largest, after United States of America and China and is

ahead of Germany. The countrys stands at 23rd

position when compared on the basis ofGDP.

After World War II, there were factors that led and helped Japan to become a technologicallyadvanced economy. The success of Japan basically is because of two things:

Close Interlocking of the holders like Manufacturers, suppliers and Distributorsknown as keiretsu,

The guarantee of lifetime employment for a substantial portion of the urban laborforce

Though now these features are losing importance because of global competition and domesticdemographic change.

Imports

1. The industrial sector of the economy is dependent on import of the raw materials andfuels.

2. Japan though self-sufficient in rice, imports about 60% of its food on a caloric basis.Economic Growth

3. Worlds largest fishing fleets accounts for 15% of the total global catch are beingmaintained by Japan. From 1960-80s there has been spectacular real economic growth.But the story was not same in 1990s; this was due to inefficient investment and the assetprice bubble.

Exports- leading to recession

4. It was in 2008 that the economy entered into recession even though the financial sectorwas not that much affected with the sub-prime mortgages, it was the down sloppingbusiness investment and the demand for Japan exports globally that pushed the economy

further into recession.

Trade Deficits

5. In early 1960s the economy incurred an annual trade deficits ranging from US$400million to US$1.6 billion. However it changed during 1965-1969. The economy wasknown as the surplus trading economy.


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Trade surplus

6. The rise in surplus during early 1970s led United States to devalue the Dollar andrevalued Japans yen- this gave an end to bretton wood system of fixed exchange rates.The rise in surplus was due to increasing exports and low imports.

Imports and Exports

7. Export Growth and stagnant imports of Japan helped the economy in the times of risingpetroleum prices in the period of 1970s to 1980s

Currency Management:

The value of the currency is determined by the foreign exchange markets keeping in mind the

demand and supply.

1. The demand of Yen- Depends on desire of the foreigners interest in investingin Japan.

2. The supply of Yen- Dependent on the wish of Yen holders.By 1971 the currency got undervalued due to which the cost of exports in the foreign marketswas very low and the imports from those markets costed the economy too much. Theundervaluation was clearly noticed in the current account balance as well.

Even though the in 1973 the nations allowed their currencies to float, The Japanesegovernment still continues to interfere in the foreign exchange marketing because of thegrowing concern that the rise in the value of currency would lessen the growth of exports bymaking the economys products less competitive and leading to a damage in industrial baseas well.

There was a drastic change in the value of currency during oil shocks:

Before the oil prices impact, the market caused an increase in the currency value i.e.

271 per US$1 in 1973.Increase in the cost of oil caused the value to depreciate i.e. 290 to 300(1974-1976). But the trade surplus got Yen back to 21(1978).

The second oil shock reversed the whole situation with the value of currency droppingto 227 by 1980.

In 1980s, the currency failed to rise in value even though current account surpluses returnedand grew quickly. The increase in the current account surplus generated stronger demand foryen in foreign-exchange markets, but was an offset by other factors. Difference in interest

rates, with United States interest rates much higher than those in Japan, and the continuing


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moves to deregulate the international flow of capital, led to a large net outflow of capitalfrom Japan.

This capital flow increased the supply of yen in foreign-exchange markets, as Japaneseinvestors changed their yen for other currencies (mainly dollars) to invest overseas. This kept

the yen weak relative to the dollar and fostered the rapid rise in the Japanese trade surplusthat took place in the 1980s.

In 1985 the value of Yen increased, which made exports of Japan less cheaper and importsgot more competitive to price. The currency appreciated in 1985 but the effects on the currentaccount balance was seen till 1987.

External Economic Summary

The Imports of the economy accounts to $490.6billion (2009), with major import Partners asbelow:

GrossExternal

Debt

ForeignDirect

Investment

Imports

Exports


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The Exports of the Economy was $516.3 billion (2009)

It can be inferred that the Net exports of the Economy are positive which is good in mostcases.

FOREIGN DIRECT INVESTMENT: The FDI of the economy is $205.4 billion

GROSS EXTERNAL DEBT: The gross external debt is 204.5 trillion yen.

ImportingChinaUSASaudi Arabia

AustraliaSouth Korea

Exporting Partners (2009)

China

USA

South Korea


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5.I)monetary policy:

By Nipun Sharma-10BSPHH010476 (Seat-48)

In response to the economic recession, the Bank of Japan took various steps to ensure

stability in the market ; for ex (a)lowering the policy rate in two parts from 0.5 percent to 0.1percent in October and December 2008, and providing enough liquidity to the markets,including unlimited U.S. dollar funding.(b) In addition to this, the Bank adopted exceptionalmeasures such as outright purchases of CP and corporate bonds to support a recovery in thefunctioning of market. (c)Also, through its special funds-supplying operations to facilitatecorporate financing, the Bank provided an unlimited amount of funds at a fixed rate of 0.1percent against corporate debt submitted as collateral. By the help of the above mentionedefforts, the Bank helped firms deal with difficulties in funding through markets and alsoencouraged interest rates to decrease.

After achieving the intended objective of restoring the proper functioning of markets, the

Bank decided to terminate purchases of CP and bonds by the end of December 2009. In themeantime, it decided to extend special funds-supplying operations to facilitate corporatefinancing until the end of March 2010, and thereafter to continue providing liquidity throughmonetary policies.

At the Monetary Policy Meeting held on 1st Dec. 2009, the BOJ decided to introduce a newoperation to provide funds of 10 trillion yen approximately, for a period of three months at afixed rate of interest of 0.1 percent. This decision was made so as to come out of economicturmoil from the financial side against the background of increased risk that internationalfinancial developments and foreign exchange market instability since the latter half ofNovember 2009, such as the debt crisis in Dubai, might adversely affect economic activityby impacting business and household sentiment.

The Banks basic attempt by using monetary policy at present is to provide support to theJapanese economy in order to overcome deflation and return to a sustainable growth pathwith stability in the price level.

It is important for the BOJ to maintain this basic monetary policy. At the same time, the Bankshould not have any already decided outlook regarding the future use of monetary policy, butshould take measures that would be most appropriate on each occasion in response tochanging economic and financial conditions.

Measures to Pull Japan out of Economic Disarray

The current position of the Japanese economy is considered to be of modest debt deflation,in which prices continue to fall as companies and banks - suffering under the weight ofexcessive debts and NPLs(non performing loans), respectively - are forced to sell their assetsat .Thus, while deflation is one of the major cause of the further increase in NPLs, thecontinuation of the NPL problem is also a cause of deflation. Reducing banks' Non-performing loans is a vital policy for severing the mechanism of debt deflation (or the viciouscycle of the continuation of deflation and an increase in NPLs), and this is the policy agendathat must be given high priority if Japan is to be pulled out of its ongoing economic disarray.

As a step to facilitate corporate restructuring, it is inevitable to ease restrictions on banks' tax-

free disposal of NPLs, which are overly stringent and have been encouraging creditor banksto force small and medium-size corporate borrowers into bankruptcy. Monetary policy to


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counter deflation: In response to the turmoil in economic and financial conditions, the Banktook various steps to ensure market stability; for example, lowering the policy rate in twostages from 0.5 percent to 0.1 percent in October and December 2008, and providing enoughliquidity to the markets, including unlimited U.S. dollar funding. Furthermore, the BOJadopted exceptional step such as outright purchases of Commercial Papers and corporate

bonds to support the desired recovery in market function. Also, through its special funds-supplying operations to ease the corporate financing, the BOJ provided an unlimited amountof funds to counterparties at a fixed rate of 0.1 percent against corporate debt submitted ascollateral. In this way, the BOJ tried to help firms to deal with difficulties in funding throughmarkets and also encouraged interest rates to decrease.

ii)Japan's Fiscal Policy

$154.55 billion stimulus plan has been declared by Japans Liberal Democratic Party. The

plan includes measures to

(a)create jobs,(b) revive the real estate market,

(c) And ease corporate costs, largely via new fiscal policy.

The fiscal easing, or tax cuts, will help create new employment opportunities the emergency

small-business loan plan follows on similar measures taken last year in previous stimulus

packages. It seeks to protect weak, small companies from losses financial institutions have

suffered. Their lack of availability of credit is a major impairment for domestic firms that

need this cash flow for daily operations.

It is true that Japan has fiscal shortfalls, but it is almost certain that the government will

certainly hike VAT once the country is out of its economic troubles. Surely this will help pay

back tax losses which are incurred now and in the previous stimulus package.

The new package is expected to generate an increase of 2% in GDP and 1.4 to two million

jobs. This new stimulus package is Japans 4th in less than eight months, but such a policy is

needed badly since Japan depends a lot on exports and the exports are falling.

Despite of the fact that Japan posted a trade surplus in February, both domestic and foreign

demand collapsed in March. Major auto and electronics manufacturers have cut down onproduction, sending shockwaves through the domestic market. Due to this, residents stop

spending, as fears of job losses loom. Which in the long run can be a chronic problem for the

country?


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iii)Trade policy :

Since Japan depends a lot on its exports. So all its trade policies are designed to promoteexports.

(i) Export-promoting tax system

(a) Special deduction of export income:

In Japan exporters are allowed to subtract certain percentage of export income fromtheir total income, which gives producers a perk to export, because the same value of sales inthe foreign market brought more after-tax income than the value of sales in the domesticmarket. However, this program constituted a violation of the GATT provision and wasabolished in 1963.

(b) Import tariff refund

When the Japanese producers import raw materials and intermediate goods toproduce export goods, import tariffs paid on the input are refunded to producers at the time ofexport.

(ii) Export-promoting financing

(a) Pre-shipment export bill discount:

When producer A in Japan exports goods to import to B in, say, the United States, thetransaction is usually settled in the form that importer B issues a payment bill (similar to acheck) to producer A in Japan. Producer A brings the bill to a foreign exchange bank in Japan

to receive money for his already exported goods. Normally, the cash transaction is madeafter producer A completed the shipment of the exported goods. However, in order toencourage exports, the Bank of Japan rediscounted the bills at very low interest rate beforeactual shipment is made.

(b) Japan Export-Import Bank

In 1951, the Japan Export-Import Bank was established to provide medium and long-term loans to shipbuilders and producers of plants (or mini-factories) whose major marketswere those in foreign countries.

Export Contest

In order to encourage export, the Japanese government set up export contest amongfirms to combine the benefits of competition and cooperation. But for competition to besuccessful reward s are necessary. In Japan, preferential access to credit and foreign exchangeare very attractive rewards. The government officials who have designed and supervised thecontests were generally competent and impartial.

Import Policy

(1) Customs Clearance Procedures

The average time taken in customs clearance from import declaration to importpermission in Japan has been shortened by reform of customs clearance procedures,


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expanded introduction of computerized system and other measures. The Governmentof Japan has introduced "Simplified Declaration Procedures" in March, 2001 whichallows certain cargoes to be released prior to lodging of a declaration for customs dutypayment, by separating import declaration and duty payment declaration.

(2) Agricultural and Food Products

Tariff levels of each country were determined by the Uruguay Round Agreement andthe Japanese Government has been properly implementing the agreement. WTOMembers have maintained certain tariffs, as per the WTO Agreement.

(3) Leather

Japan introduced tariff-quota system for leather and leather shoes in 1986, as per theGATT rules. The Government of Japan has steadily implemented significant reductionof the tariff rates which was committed in UR. In addition to this, quota is allocated to

importers automatically calculated following calculations that are done according to apublically specified formula.

(4)Wood Products and Housing

Japanese Agricultural Standard (JAS) for wood products is a voluntary system formaintaining quality standard for wooden products that are distributed domesticallywhich treats domestic products and import products equally.

Ministry of Land, Infrastructure and Transport and Japan Craft Inspection Organizationheld an expert level meeting March and December last year with the National MarineManufacturers Association in order to promote mutual understanding. The meetingbased on technical knowledge of experts, was friendly and constructive, and theGovernment of Japan intends to continue to hold such meetings. In the meeting, therewas no indication of a claim neither that Japans standard was non- transparent nor thatthe standard was a trade barrier.

Summary(Trade Policy):Japans shift to free trade agreements shows a shift in conventional wisdom. In particularJapan realized the earlier policy could not reduce the growth of regionalism elsewhere andcould not resolve the costs of non-participation. To date Japan has approached the issue

bilaterally, leading to certainagreements with Malaysia and the Philippines and agreementswith Mexico and Singapore. Negotiations continue with countries like Thailand, Indonesiaand Korea. Agreements do not seem to be a testing ground for wider liberalization, reflectedin the accommodation of agricultural protection especially rice. Developed APEC membershave been excluded, Japans strategy has an Asian focus and aside from Singapore, all thecountries are developing countries. If Japans program with ASEAN countries is successful,then perhaps the Japanese conventional wisdom is filtered primarily through the lens of aredefinition of Japans Asia Strategy rather than complementing the WTO. Such aredefinition of Japans approach to regional integration to fit within the post-warGATT/WTO model may offer greater flexibility in negotiating with other countries.However, accommodating Japanese Trade Policy and Economic Partnership Agreements

Japans new conventional step alongside the aspirations of ASEAN and China still remains amajor challenge.


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iv)Japans Currency Policy:

The recent bold currency intervention made by the Japan has triggered global suspicion and

unease. However, only a few people have a clear idea of what Japan has done and what kindof backlash will be felt.

After Japans intervention in the yen exchange rate by selling of billions of dollars, that

quickly drew worlds attention, Japan decided to come back to its zero interest rate policy

(ZIRP) at the beginning of October. Its economic complications do not only lie in the long-

term money supply. Japans intervention to slow the upward movement of the yen has raised

eyebrows in the United States and brought claims that Japan is manipulating its exchange rate

in order to gain unfair advantage in world trade. In the past, Japan has intervened (bought

dollars and sold yen) in high quantities to counter the yens appreciation, but since March

2004, the Japanese government has not intervened significantly. The huge purchasing ofdollars has resulted in an accumulation of official foreign exchange reserves to $893 billion

(June 2007) by Japan which is the highest as per Japanese standards. The intervention seems

to have had little lasting effect. It mainly has slowed the rise in value of the yen rather than

reverse its direction of change. For the last few years, the yen has been continuously

depreciating and is now at a 20-year low. Private company estimates of the misalignment of

the yen range from an overvaluation of 1.8% to an under-evaluation of 29%. The median

value of these estimates is that the yen is about 15% undervalued. The problem with currency

intervention to maintain a positive balance of trade is that about half of the increase in the

value of a foreign currency gets depicted in prices of imports into the United States. Periodsof heaviest intervention also coincided with slower (not faster) economic growth rates for

Japan. Major policy options for government include (1) let the market adjust ; (2) clarify the

definition of currency manipulation; (3) require negotiations and reports; (4)require the

President to certify which countries are manipulating their currencies and take remedial

action if the manipulation is not halted.


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CONCLUSION:

From our analysis we see that Japan has gradually moved from agriculture to manufacturing

to service sector like every other developed nation. It did not jump any phase like India( India

had a transition from agriculture to services) so there is not much of a problem. The

movement through manufacturing sector is important because it leads to increase in output,

generates high employment thereby increase the income and purchasing power of people.

Deflation and policies: Deflation is caused by a shift in the AD and AS curve, particularly by

a fall in the aggregate demand i.e., there is a fall in how much the whole country is willing to

buy, at the prevailing price level. As the price of goods is falling, consumers have an

advantage in delaying purchases and consumption until prices fall a little more, which in turn

results in a fall in the overall economic activity. Since this leaves productive capacity not

fully utilized, investment also falls, leading to further reductions in aggregate demand. This is

called the deflationary spiral. The solution to falling demand is stimulus, either from theBank of Japan, by expanding the money supply, or by expansionary fiscal policy to increase

demand, and to borrow at interest rates which are below those available to private entities.

The government takes the following steps in this regard:

First, extend the maturity of debt to at least 15 years from the todays average of 5.2 years.(Whoever was responsible for allowing Japanese debt to be so short term when thegovernment can borrow at incredibly low long-term interest rates seems utterly incompetent.)That would bring average Japanese maturities above the far more sensible UK level of 13years.

Second, hire a central bank governor who knows how to create inflation an Argentine,Zimbabwean for example. It is almost certain that any moderately determined central bankercould do this, if he wanted to do so, by direct purchase of public and private sector assets on asufficiently large scale. The government should prod this along by giving the Bank of Japanan inflation target of 3 per cent, after maturities have been extended, while informing thepolicy committee that all its members will be sacked, ignominiously, if they fail to hit thetarget within two years.

Third, let us suppose inflation indeed goes to 3 per cent. That should raise the interest rate on

JGBs to 5 per cent. Other things equal, the market value of the outstanding net governmentdebt would fall by 40 per cent. So now the Japanese government buys back the outstandingdebt at its new market price, reducing the face value by 40 per cent of GDP. In the newinflationary environment, the Japanese find the real value of their huge holdings of cashfalling sharply. So they buy real assets and consumer goods, instead, and, at last, theeconomy expands vigorously.

Fourth, now the government raises taxes and cuts spending, moving into a small primarysurplus. Assume that the government only needs to borrow to roll over its debt and the debtratio stabilizes. How big a primary surplus is needed depends only on the relation betweenthe real rate of interest and the rate of growth of the economy.


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So there we have it. By extending maturities of debt, moving from deflation to modestinflation, Japan eliminates almost half of its outstanding debt, relative to GDP, andnormalizes the economy, in the process.

Bank of Japan has tried zero-interest rate policy from 2001-2006 to counter the deflation and

the stagnant economic growth. In 2006, the Japans economy started to show some signs ofimprovement as rate started to increase to 0.5% but that was not significant enough and in

late 2008, it again started to cut the rates due to the serious damages done by global economic

crisis.

Monetary Policies like quantitative easing are not helping the economy to get out of this

downward spiral. Despite of the ample liquidity, banks are struggling to encourage the credit

growth. This is obviously the typical situation of Liquidity Trap where the monetary policy

loses its effectiveness significantly.

As mentioned above, Japan has tried lots of measures to curb this deflation but the FallingWages which is more particular in case of Japan is something which is making all these

policies ineffective. People lose their purchasing power when wages fall. Companies respond

to this by cutting the prices to maintain sales volume which leads to the further wage cuts and

the productivity also start falling subsequently because of the diminishing demand. In this

way, Japanese economy has got trapped into the vicious cycle. The main reasons for the

falling wages in Japan are company-based unions, its employment culture and an

increase in the cheap non-regular workers which is unique to Japan. So, it becomes clear

that maintaining a gentle rise in the wages is very necessary in Japan to overcome this

long-term deflation in Japan. Wages did not improve during the time of recovery from 2002-2007 and the advantage of improving productivity were mostly nullified by the companies

profits. Hence, it is very necessary to increase the purchasing power of the workers in

Japan to combat the deflation and it also requires the bridge the gap between the wages

of regular and non-regular workers.

One of the other major problem that Japan is facing is it high dependency on exports

which it makes competitive by depreciating its currency. The fact that the country faces

deflation has led the policy makers to frame policies whereby they can export huge

quantities of good(since internal demand is low). But with international trade

agreements this is no more a feasible option. Also the fact that the US is not allowing itto depreciate its currency is making life difficult for them. To add to its problems china

has been constantly dumping goods.

Japan faced a lot of problems during the economic turmoil due to the high amount of

business it has with the US. Thus Japan would do good to adopt conservative

policies(not to forget the Japan bubble burst of the 80s from which till today it has not

fully recovered) like India so that there is not too much of a fall during recessionary

conditions.


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Problems Faced by Japan Due To International Trade Policies:

The WTO Ministerial Conference at Cancun was a failure for Japan for the following

reasons: (1) the increased technical complexity and disruptive domestic economic effects of

the issues being negotiated; (2) the shift in relative bargaining power among the negotiating

participants in favor of the developing countries; (3) the proliferation of bilateral and regional

free trade agreements in contrast to multilateral agreements, and (4) the increased emphasis

on achieving fairness rather than reciprocity in trade liberalization.

Japan has a problem similar to that of the US i.e. it has huge amounts of public debt. But

most part of the debt is internal to the economy (in the case of US it is external debt, thus a

huge matter of concern). Meaning to say that the government of Japan has borrowed huge

amounts of funds from the Japanese people. In both Japan and the west the problem is of

unmanageable public debt. According to estimates by all the country needs to do is generate,

say, expectations of 3 per cent inflation and the public debt problem should not prevail. Butthe longer time taken, the bigger the ultimate adjustment will need to be.

Outlook:

In the interim assessment report released after the Monetary Policy Meeting held on January

25 and 26, 2010, the median of the Policy Board members forecasts for year-on-year real

GDP growth was minus 2.5 % for fiscal 2009, 1.3 % for fiscal 2010, and 2.1 % for fiscal

2011, indicating that the Japanese economy was developing basically in line with the Bank of

Japans outlook which was released in October 2009. This shows that Japanese economy is

improving gradually, reflecting the improvement in the overseas economies.

However, the recovery in overseas economies is likely to be moderate because it takes a

considerable amount of time to overcome the various distortions accumulated in the global

economy, mainly in industrialized countries. Hence, it will take some time for the Japanese

economy accordingly to achieve a full-fledged recovery. Due to the sluggishness in the

economies of industrialized countries, it is indispensible for Japanese firms to reach out to

consumers in emerging economies, which have a rapidly expanding middle class.

There are both upside and downside risk factors which must be taken into account in

considering the outlook for the Japanese economy. The first one consists of a possibleupward movement in the economic growth of emerging economies and commodity-exporting

countries resulting from accommodative financial environments and economic stimulus

measures in various countries. The other one relates to the possible implications of balance-

sheet adjustments in the United States and European countries, as well as Japanese firms

medium- to long-term expectations of future economic.


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REFERENCES:

DORNBUSCH FISCHER STARTZ- Macroeconomics 9e

www.wikipedia.comhttp://www.economist.com/

www.boj.or.jp

www.nytimes.com/2010/03/18/business/global/18yen.html

www.mises.org/journals/qjae/pdf/qjae8_1_2.pdf - United States

Various Reports on Japan Economy

http://www.oppapers.com,

http://www.mongabay.com,

http://www.experiencefestival.com,

http://www.jstor.org,

http://www.economywatch.com,

http://www.markit.com,

http://countrystudies.us,

http://www.google.co.in\

http://wpweb2.tepper.cmu.edu/faculty/mccallum/JapanMonPol2.pdf

http://en.wikipedia.org/wiki/Monetary_and_fiscal_policy_of_Japan

http://www.boj.or.jp/en/theme/seisaku/kettei/index.htm

http://www.boj.or.jp/en/type/release/adhoc10/k101105.pdf




http://www.boj.or.jp/en/type/release/adhoc10/un1003d.pdf


http://ideas.repec.org/p/hst/hstdps/d05-99.html

http://ideas.repec.org/p/hst/hstdps/d05-99.html
http://www.economist.com/http://www.economist.com/http://www.boj.or.jp/http://www.boj.or.jp/http://www.nytimes.com/2010/03/18/business/global/18yen.htmlhttp://www.nytimes.com/2010/03/18/business/global/18yen.htmlhttp://www.oppapers.com/http://www.oppapers.com/http://www.mongabay.com/http://www.mongabay.com/http://www.experiencefestival.com/http://www.experiencefestival.com/http://www.jstor.org/http://www.jstor.org/http://www.economywatch.com/http://www.economywatch.com/http://www.markit.com/http://www.markit.com/http://countrystudies.us/http://countrystudies.us/http://www.google.co.in/http://www.google.co.in/http://www.google.co.in/http://wpweb2.tepper.cmu.edu/faculty/mccallum/JapanMonPol2.pdfhttp://en.wikipedia.org/wiki/Monetary_and_fiscal_policy_of_Japanhttp://www.boj.or.jp/en/theme/seisaku/kettei/index.htmhttp://www.boj.or.jp/en/type/release/adhoc10/k101105.pdfhttp://www.boj.or.jp/en/type/release/adhoc10/k101028.pdfhttp://www.boj.or.jp/en/type/release/adhoc10/k100126.pdfhttp://www.boj.or.jp/en/type/release/adhoc10/k100317.pdfhttp://www.boj.or.jp/en/type/release/adhoc10/un1003d.pdfhttp://www.boj.or.jp/en/type/release/adhoc10/k100407.pdfhttp://ideas.repec.org/p/hst/hstdps/d05-99.htmlhttp://ideas.repec.org/p/hst/hstdps/d05-99.htmlhttp://ideas.repec.org/p/hst/hstdps/d05-99.htmlhttp://ideas.repec.org/p/hst/hstdps/d05-99.htmlhttp://www.boj.or.jp/en/type/release/adhoc10/k100407.pdfhttp://www.boj.or.jp/en/type/release/adhoc10/un1003d.pdfhttp://www.boj.or.jp/en/type/release/adhoc10/k100317.pdfhttp://www.boj.or.jp/en/type/release/adhoc10/k100126.pdfhttp://www.boj.or.jp/en/type/release/adhoc10/k101028.pdfhttp://www.boj.or.jp/en/type/release/adhoc10/k101105.pdfhttp://www.boj.or.jp/en/theme/seisaku/kettei/index.htmhttp://en.wikipedia.org/wiki/Monetary_and_fiscal_policy_of_Japanhttp://wpweb2.tepper.cmu.edu/faculty/mccallum/JapanMonPol2.pdfhttp://www.google.co.in/http://countrystudies.us/http://www.markit.com/http://www.economywatch.com/http://www.jstor.org/http://www.experiencefestival.com/http://www.mongabay.com/http://www.oppapers.com/http://www.nytimes.com/2010/03/18/business/global/18yen.htmlhttp://www.boj.or.jp/http://www.economist.com/


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Japan Economy Final Project

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