Economy of JAPAN

(MACROECONOMICS PROJECT REPORT)

MBA PROGRAM(2010-12)
SECTION-J

Submitted to: Prof. Jojo Mathew George

Submitted by: GROUP 9
S.No. 1. 2. 3. 4. 5. Name Varun Kohli Aayushi Kasliwal Nipun Sharma Khushboo Gumber Saurabh Trivedi Enrollment No. 10BSPHH010861 10BSPHH010004 10BSPHH010476 10BSPHH010917 10BSPHH011076 ~1~ Seat No. 46 47 48 49 69

Table of Contents

S.No. Topic
1. 2. 3.

Introduction Sectoral Analyses Economic Growth, Employment and Inflation management

Page No. 3

7 10

4. 5. 6. 7.

External sector (Currency management, NX, Net flow 15 of funds etc) Prevailing economic policies 19 (Monetary/Fiscal/Trade/Currency) CONCLUSION & OUTLOOK 24 References

27

~2~

and foreign languages in Japan. technology.5% was slower than growth in other major developed economies. This implied lowering taxes and increasing G.000 Westerners to teach modern science. along with banking facilities and merchant associations. improved roads. The government also built railroads.000 U. and 4% in the 1980s.Introduction: By Aayushi Kasliwal-10BSPHH010004 (Seat-47) The economy of Japan is the third largest in the world after the US and the People‘s Republic of China and ahead of Germany at 4th. Japan‘s post war economy developed from the leftovers of an industrial infrastructure that suffered widespread destruction during World War II. The country saw its per capital GNP rise from 276 U. until supplanted by the People's Republic of China in 2010.S. thus increasing AD. to keep its economy afloat. With average growth rates of 10% in the 1960s. The economic history of Japan is one of the most studied for its spectacular growth for three periods. dollars in the late 1980‘s. foreign commerce. Growth in Japan throughout the 1990s at 1. and hired more than 3. Therefore. a significant expansion of domestic and. These factors include Japan‘s widespread use of the industrial policy. dollars in 1950 to nearly 25. Japan was able to establish and maintain itself as the world's second largest economy since 1968. Growth declined markedly in the late 1990s largely due to the Bank of Japan's failure to cut interest rates quickly enough to counter after-effects of over-investment during the late 1980‘s. sent thousands of students to the United States and Europe. and a diffusion of trade. Second was the Meiji Restoration (in 1868) to be the first non European power. Japan became one of the world‘s largest and most important iron and ~3~ . mathematics. rising stock and real estate prices caused the Japanese economy to overheat in what was later to be known as the Japanese Asset Price Bubble. 5% in the 1970s. Japan entered a liquidity trap. However. The construction trades flourished. increased shipping of commodities. Economic development during the Edo period included urbanization. and inaugurated a land reform program to prepare the country for further growth and development. Some economists believe that because the Bank of Japan failed to cut rates quickly enough. and penetrating international markets in the car/electronic manufacturing industries. Post World War II. There are several factors that have lead to this rebuilding and explosion of the Japanese economy. Japan experienced rapid economic growth. initially. First was the foundation of Edo (in 1603) to whole inland economical developments.S. As a result Japan was considered a less developed country with per capital consumption roughly one-fifth of the U. becoming one of the world‘s largest creditor nations.1. Third was the defeat of the World War II (in 1945) when the island nation rose to become the world's second largest economy. The industrial policy has been consciously used by Japan for the sole purpose of stimulation of economic growth. in the second half of the 1980s. For three decades from 1960.S. leaders inaugurated a new Western-based education system for all young people. The economic bubble came to an abrupt end as the Tokyo Stock exchange crashed in 199092 and real estate prices peaked in 1991. During this period (1868–1912). Japan fought to regain the one-third of its industrial base it had lost in the war. giving rise toThe Lost Decade. Japan ran massive budget deficits (added trillions in Yen to Japanese financial system) to finance large public works programs.

8% through the fiscal year that ends March 2009. In August 2010 the yen hit a 15 year high against the dollar in nominal terms. The following graph shows the GDP Growth rate of Japan over the last 3 years: ~4~ . These two core competencies factored into the growth of the manufacturing industry.8% in the third quarter of 2008. although economists see this as a move merely to please the Democratic Party of Japan because. 2008. according to the Japan Times. In addition to having to deal with business trends such as deregulation and globalization. policy measures based on incorrect information will not only fail to succeed in their intent.S. In real exchange rate terms. On November 17. It is forecasted to have shrunk 0. No matter how capable and powerful the bureaucracy. however. This factor will increase the tax and social security burden that workers will have to carry. Although the economy has recovered in 2010. levels of public debt remain high approaching 200% of GDP. At the same time it is likely that a decrease in personal savings will result in lowering of overall capital accumulation. The institutional approach Japan has taken highlights one of the key functions of any sort of effective industrial policy. These labor shortages will become a limiting factor to the future growth potential of Japan‘s economy. the yen was still valued at less than its average since 1990.7 per cent. It was reported that Japan's economy contracted at an annual pace of 1. Over 16% of Japan‘s population is 65 or older. In July 2009 unemployment reached a post-war high of 5. On March 17. Japan‘s technological innovations have enabled the country to regain a strong position in the development and construction of large-scale machinery. the Japanese industry has also been affected by the aging of the Japanese society. Japan is also the world‘s largest producers of machine tools.steel exporters. 2010 the Bank of Japan moved to boost yen reserves for 3-month bank loans to 20 trillion yen. as no money is leaving the financial system. automobiles and electronics. Within the next 15 years this figure is expected to be over 25%. there will be no impact on long term rates in either the ordinary market or the Foreign exchange market. and South Korea. but are likely to have a negative effect on growth. Japan has taken this theory and correctly identified the greatest danger of the industrial policy and grown from a ―less developed‖ country to a ―developed‖ country in a matter of four decades. As a result of this the foreign press and the IMF believe Japan should be doing more to help its economy recover. Japanese government officials announced that the economy was in a recession. The key function is the gathering and dissemination of accurate information. which are primarily exported to the U.

With the government currently focused on fiscal reconstruction. Japanese society has viewed efficiency." The concept that efficiency is "just" is ~5~ . cars and other products has buoyed spending. the government is unlikely to extend or expand those programs. which accounts for nearly 60% of Japan's GDP. But with these incentives no longer in place. and safety as aspects of "justice. 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. Rather. However.4%. are whether businesses will restart spending and consumers will keep their purse strings loose.From the graph it can be seen that Japan's gross domestic product grew 0. which are the basis of everything. which has been sluggish in Japan since the global financial turmoil in 2008. and the trend is expected to continue in 2011. the greatest change lies in the nation's ethics and aesthetics. The expansion accelerated in the third quarter of 2010 as shoppers bought cars before government subsidies expired. up from a revised +0. or at an annualized pace of 3. was flat in the April-June period. which has remained stagnant for two decades. Business investment. Since the Second World War. compared with a revised 0. equality. air conditioners to stay cool in a hot summer.5% growth in the previous quarter. and cigarettes before a new tobacco tax kicked in. a slowdown already appears underway as deflation and the persistently strong yen drag on growth. the basis for all choices and judgments. that is. the chances of additional fiscal spending are declining sharply. The key questions over the prospects for the country's economy.9%. The result marked the fourth straight quarter of expansion. While government purchase incentives for electronic goods. the major upheavals that Japan is facing today are not limited to economic structural reforms and the renewing of the established systems.9% in the JulySeptember period from the previous quarter. could make a notable upturn in 2011 due mainly to tax reforms the government endorsed in December. Private consumer spending.

Parts of Europe are ageing fast. by making it easier to sell services (such as residential care) to the elderly. As in Japan. have enjoyed a ―demographic dividend‖—a rapidly expanding workforce and falling birth rate—similar to Japan‘s in the 1960s to 1980s. shifting responsibility from the public to the private sector. plenty of others are shuffling along behind it.common to all contemporary industrialized societies. less discrimination against them in the workplace would encourage them to go on working. With fewer children and elderly to pay for. the important thing is to build up efforts to dismantle regulations as far as possible. and by encouraging more competition in the domestic economy so that it can withstand the inevitable shocks to external trade. Deregulation will also lead to the expansion of domestic demand and an increase of imports and. China and Taiwan. Retired people could be coaxed back to work. as recent protests against rising retirement ages in France and Greece attest. Though the effects of deregulation will be seen slowly over time. Such places will look to Japan for how to cope with the economic and social consequences when their manpower starts to dry up. 62% of working women quit their jobs after having their first child. At present. relatively few women work after becoming mothers and even fewer immigrants are let in. Deregulation would help. and are unwilling to adapt. Although Japanese society is growing older faster than anywhere else in the world. especially if they could claim their pensions while working. ~6~ . such countries could plough savings back into economic expansion. Other Confucian countries such as South Korea. as a result. and it has been recognized as such in Japan ever since the Meiji era. for instance. More immigration could help Japan maintain an innovative streak that it risks losing as its workers age. by freeing up finance to allow them to make better use of their savings. The hardest task will be to raise Japan‘s productivity to offset the looming manpower shortage. will contribute to correcting the trade imbalance.

and to 7.2. In the late 19th century (Meiji period). Together with the Japanese mining industry. Japan is among the largest producers of fish in the world. Employment in agriculture declined in the pre-war period. and fishing form the primary sector of industry of the Japanese economy.2 % in 1988. corn.9 % in 1977. pears and oranges. However. Only 12% of Japan's land is suitable for cultivation. 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 ~7~ . 85. SECTORAL ANALYSIS OF JAPANESE ECONOMY By Varun Kohli. but the per hectare crop yield is one of the highest in the world. with the share of net agricultural production in GNP finally reduced between 1975 and 1989 from 4.5 % in 1965. sorghum and soybeans. Japan is also self-sufficient in producing apples. forestry.1 to 3 % In the late 1980s. Agriculture. but the sector was still the largest employer (about 50 % of the work force) by the end of World War II. 11.10BSPHH010861 (Seat-46) PRIMARY SECTOR Only 12% of the land in Japan is arable. forestry. but together they account for only 1. mainly from the US. it heavily imports wheat. these sectors had accounted for more than 80 % of employment.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. but the agricultural economy is highly subsidized and protected.3% of gross national product. The importance of agriculture in the national economy later continued its rapid decline. Agriculture. This sector engages about 4% of the total labor force and is highly subsidized and protected. It was further declined to 23. It is the third largest importer of US food products. and fishing dominated the Japanese economy until the 1940s. but thereafter declined into relative unimportance. Japan is self-sufficient in the production of rice.

~8~ .7% of total domestic industrial production in 2005. industrial chemicals. manufacturing sector of Japan is widely diversified. Honda. Construction has long been one of Japan's largest industries. and iron and steel. industrial robots. Although the manufacturing industry relies heavily on the import of raw material and fuel. optical media. optical fibers. aerospace. with the help of multi-billion-dollar government contracts in the civil sector. gas. facsimile and copy machines. optical fibers. optical media. computers. Farmers became mass producers of rice. textiles and processed foods. such as steel and shipbuilding. up from 45. as the home of big manufacturers such as Toyota. either declined or simply held stable. Economic growth is also dependent on petrochemicals. machine tools. One-fourth of Japan's GDP is heavily dependent on imported raw materials and fuels. bioindustry. and water utilities) contributed 50. and fermentation processes. Toshiba. The major manufacturing industries of Japan are automobiles. Matsushita. pharmaceuticals. The fields in which Japan enjoys relatively high technological development include semiconductor manufacturing. Suzuki and Hitachi. and power. Nikon. Japan is best known for its automotive and electronics industries. Mazda. it comprises some of the most successful companies in the world. Sony. SECONDARY SECTOR This sector employs about 28% of the total labor force of the country. manufacturing. even turning their own vegetable gardens into rice fields.8 percent in 1975. shipbuilding. Nissan. Mitsubishi. During this period.policy under which high rice prices were guaranteed and farmers were encouraged to increase the output of any crops of their own choice. some of the older heavy industries. The nation's industrial activities (including. Japan also holds a large market share in high-technology industries such as semiconductors. Internationally. and (in recent years) aerospace. optoelectronics. semiconductors. This steady performance of the industrial sector over the period was a result of the growth of high-technology industries. optoelectronics. consumer electronics. Robotics constitutes a key longterm economic strength.

retailing finance and insurance. however. communications. and electronics. chemicals. real estate and retailing. steel. and government grew rapidly. The secondary sector (manufacturing.TERTIARY SECTOR This sector is the backbone of the country‘s economy. During the 1980s. To boost the sector the Japanese government announced a stimulus package of ¥7.2 trillion in 2009. The real estate and retailing are the other most important component of service sector. the growth was impacted by the 2008 recession. employing 68% of the labor force as of 2009. and mining) expanded to 35. Japan's economic growth in the 1960s and 1970s was based on the rapid expansion of heavy manufacturing in such areas as automobiles. ~9~ . the Japanese economy began to move away from heavy manufacturing toward a more service-oriented (tertiary sector) base.2 percent in 1990 and was expected to grow to 62 percent by 2000.6 percent of the work force by 1970. construction. transportation. jobs in wholesaling. Some of the major service industries in Japan are banking. insurance. while secondary-sector employment remained stable. However. By the late 1970s. telecommunications. real estate. The tertiary sector grew from 47 percent of the work force in 1970 to 59. shipbuilding. transportation.

Japan‘s highly acclaimed postwar education system contributed strongly to modernizing the whole process. Japan‘s GDP was growing at a rate of more than 9%.3. Economic Growth. construction and the infrastructure.K. After the war. In this period. ~ 10 ~ 2004 . Italy. Japan‘s high literacy growth rate and well-advanced education acted as the main source for its technologically advanced economy. Employment and Inflation management In JAPAN: By Saurabh Trivedi-10BSPHH011076 (Seat-69) Real GDP Growth 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% S t a ble gr owt h per iod High gr owt h per iod No gr owt h per iod 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 Yen floats 2nd Oil Shock 1st Oil Shock Bubble collapses I) Post-War Growth (1951-1970): After the end of the Second World War. Between 1956-60. Germany and France. Japan became the world‘s largest ship manufacturer and world‘s top steel producer and it surpassed the U. 42% of the employment of Japan was in these sectors whereas only 25% of the labor force remained in the agriculture. Japan introduced the concept of 'just-in-time inventory' and other concepts. which became the drivers of its growth. which have become the pillars of various corporations around the world. This is the period in which the Japan had the highest growth rate till today after the WW-II. the Japan got relieved from the militarydominated government which helped it devoting all its resources to reconstruct its lost and well known industrial capacity. Japan embarked on a journey of rapid industrialization with the support of its financial institutions.The main sources of growth were manufacturing and mining..

7% in the period of 1974-79.These structural changes were not being able to check the slowing of growth rate but helped Japan to face the crisis in a more comprehensive manner than by the other countries. By 1973. In 1992. the Nikkei Stock market fell by 38% wiping out 300 trillion Yen in value and land prices dropped sharply from their speculative peak. Japan faced its first postwar decline in its growth in this period together with high price inflation. Due to the Oil Crisis of 1973. Even the automobile and electronics industries that had experienced tremendous growth in the previous 2 to 3 decades entered the recessionary period in 1992.2%. This helped the manufacturing and mining sector to grow at 17% per year between1965-70. This push into the recession is known as the ―bursting‖ of the ―bubble economy‖.  The Bubble Economy (1980-90): After the 1985 Plaza Accord. but the efficient financial measure taken by the government contributed to growth in domestic demand.This consequent increase in the price of Japanese exported goods reduced their competitiveness in the overseas market. The main elements of this achievement were its initial focus on certain areas of industry: electronics. During this period. Japan was on track to become the number 1 economy of the world. the average real GDP growth averaged around 1. Japan integrated its manufacturing and service sector to streamline its operation due to which its growth rate evened out to 8%.By 1970s. land prices got doubled and Nikkei Stock market rose by 180%. In this era Japan entered into the virtuous cycle featuring demand expansion-production expansion-increase in income-consumption expansion-further income expansion-increase in savings-investment growth and an expansion of production capacity. ii) Stable Growth Period (1970-1990): In 1970. higher interest rate led the downward spiral of the stock prices. However. The bubble happens and the bubble bursts but unfortunately for Japan the decline never ended. Japan was already suffering from the double digit inflation rate due to the oil crisis.The higher land prices led to higher stock prices which led to equity finance boom.7%. a rapid increase in the money supply led to extensive speculation in the real estate and domestic commodity market.The domestic market of Japan shrank at the same time that Japan‘s share of the USA‘s market declined.In May 1989. focus on export and later on consumer goods for domestic market. Inflation peaked at around 25% in 1974. Japan has the third largest economy in the world. the Government tightened its monetary policies to suppress the rise in the value of assets. It opened some of its industries to international competition. Due to these changes.The second oil crisis in 1979 forced the Japan to a fundamental shift in its industry structure from emphasis on heavy industry(highly oil-dependent) to VLSI semiconductor industry. By the end of 1990. Land and Asset prices were rising drastically in the late 1980s. the Yen‘s value rose sharply reaching 120 Yen to the U.S.It almost stopped growing. Dollar in 1988-three times its value in 1971. automobile. the real GNP growth slowed to 1. Until 1990. Its electronics export was facing a stiff competition from the Taiwan.5% in 1980s. a major step was taken by the Japan. Korea and USA semiconductor products. shipbuilding. 1979 Oil Crisis had little impact on Japan economy and it start growing at a pace of 5. iii) The post bubble recession continued through the second half of the 1990s and into the new millennium. Between1990-2004. One of the possible reasons for this was over dependence on domestic consumption in 1980-90 ~ 11 ~ .In the mid 1960s. Government also responded with the Keynesian stimulus which included massive deficit spending funded by bond issues. Japan faced large fluctuation in the rate of inflation in this era.The consequent recession lowered the GDP growth rate from 10% level to an average of 3.

This. permit the bankruptcy in the corporate sector and instead adopted the policy of denial and avoidance. combined with falling exports due to the Asian Financial Crisis.485 billion yen by the end of 2000. Employment salaries and wages also fell which further dragged the consumer spending down and in 1998 Japan faced the negative economic growth.The unemployment rate increased from 2. Due to the further tightening of the lending by the banks and financial institutions (due to huge volume of bad debts aggravated by still falling land prices) forced the companies to reduce their investments in plants and equipment. however.827 billion yen in 1990 to 469. It rose only from 428. a reduction in the government investment activities and the bankruptcies of the major financial institutions quickly worsened the recession. Japan faced four possible identifiable recessions. This.8% in 2000. Huge amount of import of highly cheap Chinese goods. when its policy changed.Growth has been negative since 1998. partly due to the fall in the value of Yen and additional demand generated by the recovery efforts for the January 1995 Great Hanshin-Awaji Earthquake. the Bank of Japan continued too long with its tight monetary policy and did not shift aggressively enough to quantitative easing after 1993. It was quite simply a classic stagflation which is still going on. As far as world‘s standards are considered. ~ 12 ~ .In this period. resulted in the lower profit in all its sectors. Demand shortage. Real GDP during the 1990s stagnated. Diminishing growth potential of Japanese economy. a rise in the consumption tax rate.which did not increase from more than 2% after 1989. Some temporary improvements were seen in the economy in 1995 and 1996. but it continued to fell further and became negative in 1994. Regulatory authorities were unwilling to close insolvent financial institutions.1% in 1991 to 4.Many economist says that this deflation is derived from:     Accumulated bad loans. In 1997. it is not a very high increase in unemployment but in Japan‘s context it is quite significant as this never crossed the mark of 2. In hindsight. we also know as the ―lost decade‖ in Japan.8% in the entire history of Japan‘s economy. Japan’s Deflation: Inflation in Japan was already low in the late 1980s.

Otherwise increase in the productivity lead to wage hike. It did the most damage in these 2 sectors. increase in demands and ultimately this process creates more jobs.  Insolvent Companies and Banks. Only the Japan‘s manufacturing sector was able to increase income consistently by raising productivity. rising productivity allowed the companies to reduce its investment in labor. which caused unemployment to rise. Japan has an ageing population (23% of people are above 65 years) that is not growing and will soon start a long decline. Real estate‘s prices were falling even when the other countries were seeing a surge in this sector. This made Japan‘s stagnation even worse. This is how falling wages shrank domestic demand and produced a negative cycle in Japan. Deflationary pressure grew as a result. In Japan‘s case. There was absolutely no growth in the nominal size of Japan‘s economy because of deflation during Japan‘s lost 20 years. Japan‘s deflation was harmful to the finance industry and the service sector mainly. A decline in the wages despite of the outstanding productivity was the most significant characteristics of Japan‘s prolonged period of stagnation. Consumption shrank and the wages fell as the supply of the worker available increased. ~ 13 ~ . It was only Japan which experienced no growth in this period. But due to the yen‘s appreciation manufacturers were unable to translate the higher earning into the higher salaries for their employees. This is precisely what happened in Japan.

Japan‘s export.After 2002. Japan economy entered a period of slow but steady growth that continued through the middle of this decade. again got dramatically plunged. Reflecting business recovery. which has been the engine of growth in this period of expansion. (See Figure) ~ 14 ~ . The bank came back on track of lending and acts properly as financial intermediaries. This again showed the vulnerability Japan‘s reliance on its export demand which become very low due to the crisis of 2008. After a long period of more than 10 years.However this expansion got severely hit by the 2008 financial shock which originated with US subprime mortgage crisis. The non-performing or bad debts ratio of major banks got lowered from 8% in 2002 to 2% in 2006 and this has contributed to regain the lost confidence for the banks. the Nikkei Stock rose strongly between 2003 to 2006. the negative after-effects of ‗bubble economy burst‘ finally appeared to have been largely tackled.

It was in 2008 that the economy entered into recession even though the financial sector was not that much affected with the sub-prime mortgages. suppliers and Distributors known as keiretsu. Trade Deficits 5. it was the down slopping business investment and the demand for Japan exports globally that pushed the economy further into recession. Japan though self-sufficient in rice. The industrial sector of the economy is dependent on import of the raw materials and fuels.6 billion. JAPAN. The guarantee of lifetime employment for a substantial portion of the urban labor force Though now these features are losing importance because of global competition and domestic demographic change.10BSPHH010917 (Seat-49) The economy of Japan is the third largest. However it changed during 1965-1969.4. ~ 15 ~ . this was due to inefficient investment and the asset price bubble.leading to recession 4. imports about 60% of its food on a caloric basis. there were factors that led and helped Japan to become a technologically advanced economy. Economic Growth 3. The country‘s stands at 23rd position when compared on the basis of GDP. After World War II. Exports. In early 1960‘s the economy incurred an annual trade deficits ranging from US$400 million to US$1. From 1960-80‘s there has been spectacular real economic growth. Imports 1. 2. But the story was not same in 1990‘s. The economy was known as the surplus trading economy. World‘s largest fishing fleet‘s accounts for 15% of the total global catch are being maintained by Japan.EXTERNAL SECTOR: By Khushboo Gumber. after United States of America and China and is ahead of Germany. The success of Japan basically is because of two things: Close Interlocking of the holders like Manufacturers.

Even though the in 1973 the nations allowed their currencies to float.Dependent on the wish of Yen holders. By 1971 the currency got undervalued due to which the cost of exports in the foreign markets was very low and the imports from those markets costed the economy too much. Difference in interest rates. but was an offset by other factors.e. The demand of Yen.this gave an end to bretton wood system of fixed exchange rates. But the trade surplus got Yen back to ¥21(1978). The second oil shock reversed the whole situation with the value of currency dropping to ¥227 by 1980. the market caused an increase in the currency value i. with United States interest rates much higher than those in Japan.e. ¥271 per US$1 in 1973. the currency failed to rise in value even though current account surpluses returned and grew quickly. Export Growth and stagnant imports of Japan helped the economy in the times of rising petroleum prices in the period of 1970‘s to 1980‘s Currency Management: The value of the currency is determined by the foreign exchange markets keeping in mind the demand and supply. The Japanese government still continues to interfere in the foreign –exchange marketing because of the growing concern that the rise in the value of currency would lessen the growth of exports by making the economy‘s products less competitive and leading to a damage in industrial base as well.Trade surplus 6. Imports and Exports 7. The rise in surplus was due to increasing exports and low imports. The supply of Yen. 1. The increase in the current account surplus generated stronger demand for yen in foreign-exchange markets. and the continuing ~ 16 ~ . There was a drastic change in the value of currency during oil shocks: Before the oil prices impact. 2.Depends on desire of the foreigner‘s interest in investing in Japan. The undervaluation was clearly noticed in the current account balance as well. In 1980s. Increase in the cost of oil caused the value to depreciate i. ¥290 to ¥300(19741976). The rise in surplus during early 1970‘s led United States to devalue the Dollar and revalued Japan‘s yen.

which made exports of Japan less cheaper and imports got more competitive to price. led to a large net outflow of capital from Japan.6billion (2009). External Economic Summary Gross External Debt Exports Foreign Direct Investment Imports The Imports of the economy accounts to $490. This kept the yen weak relative to the dollar and fostered the rapid rise in the Japanese trade surplus that took place in the 1980s. The currency appreciated in 1985 but the effects on the current account balance was seen till 1987. as Japanese investors changed their yen for other currencies (mainly dollars) to invest overseas. This capital flow increased the supply of yen in foreign-exchange markets. with major import Partners as below: ~ 17 ~ .moves to deregulate the international flow of capital. In 1985 the value of Yen increased.

3 billion (2009) Exporting Partners (2009) China USA South Korea It can be inferred that the Net exports of the Economy are positive which is good in most cases.5 trillion yen. ~ 18 ~ . FOREIGN DIRECT INVESTMENT: The FDI of the economy is $205.Importing… China USA Saudi Arabia Australia South Korea The Exports of the Economy was $516.4 billion GROSS EXTERNAL DEBT: The gross external debt is 204.

I)monetary policy: By Nipun Sharma. but should take measures that would be most appropriate on each occasion in response to changing economic and financial conditions. and this is the policy agenda that must be given high priority if Japan is to be pulled out of its ongoing economic disarray. dollar funding.1 percent in October and December 2008. 2009. This decision was made so as to come out of economic turmoil from the financial side against the background of increased risk that international financial developments and foreign exchange market instability since the latter half of November 2009. It is important for the BOJ to maintain this basic monetary policy. it decided to extend special funds-supplying operations to facilitate corporate financing until the end of March 2010. the Bank provided an unlimited amount of funds at a fixed rate of 0. the Bank of Japan took various steps to ensure stability in the market . Monetary policy to ~ 19 ~ . The Bank‘s basic attempt by using monetary policy at present is to provide support to the Japanese economy in order to overcome deflation and return to a sustainable growth path with stability in the price level. for ex (a)lowering the policy rate in two parts from 0. including unlimited U.suffering under the weight of excessive debts and NPLs(non performing loans). the BOJ decided to introduce a new operation to provide funds of 10 trillion yen approximately. respectively .5 percent to 0.10BSPHH010476 (Seat-48) In response to the economic recession. By the help of the above mentioned efforts. the Bank helped firms deal with difficulties in funding through markets and also encouraged interest rates to decrease. through its special funds-supplying operations to facilitate corporate financing. while deflation is one of the major cause of the further increase in NPLs. in which prices continue to fall as companies and banks .S.Thus. such as the debt crisis in Dubai. At the same time. (c)Also. and thereafter to continue providing liquidity through monetary policies.(b) In addition to this. which are overly stringent and have been encouraging creditor banks to force small and medium-size corporate borrowers into bankruptcy. the Bank adopted exceptional measures such as outright purchases of CP and corporate bonds to support a recovery in the functioning of market. Reducing banks' Nonperforming loans is a vital policy for severing the mechanism of debt deflation (or the vicious cycle of the continuation of deflation and an increase in NPLs). the continuation of the NPL problem is also a cause of deflation. As a step to facilitate corporate restructuring.5. for a period of three months at a fixed rate of interest of 0. the Bank should not have any already decided outlook regarding the future use of monetary policy.1 percent against corporate debt submitted as collateral. it is inevitable to ease restrictions on banks' taxfree disposal of NPLs.are forced to sell their assets at . Measures to Pull Japan out of Economic Disarray The current position of the Japanese economy is considered to be of modest debt deflation. the Bank decided to terminate purchases of CP and bonds by the end of December 2009. At the Monetary Policy Meeting held on 1st Dec.1 percent. After achieving the intended objective of restoring the proper functioning of markets. might adversely affect economic activity by impacting business and household sentiment. and providing enough liquidity to the markets. In the meantime.

small companies from losses financial institutions have suffered.S. sending shockwaves through the domestic market. Despite of the fact that Japan posted a trade surplus in February. Which in the long run can be a chronic problem for the country? ~ 20 ~ . but it is almost certain that the government will certainly hike VAT once the country is out of its economic troubles. It seeks to protect weak. largely via new fiscal policy. This new stimulus package is Japan‘s 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. Furthermore.1 percent in October and December 2008. both domestic and foreign demand collapsed in March. the BOJ provided an unlimited amount of funds to counterparties at a fixed rate of 0.5 percent to 0. Their lack of availability of credit is a major impairment for domestic firms that need this cash flow for daily operations. lowering the policy rate in two stages from 0. the Bank took various steps to ensure market stability. or tax cuts.(b) revive the real estate market.55 billion stimulus plan has been declared by Japan‘s Liberal Democratic Party. In this way. the BOJ adopted exceptional step such as outright purchases of Commercial Papers and corporate bonds to support the desired recovery in market function. It is true that Japan has fiscal shortfalls.1 percent against corporate debt submitted as collateral. for example.4 to two million jobs. the BOJ tried to help firms to deal with difficulties in funding through markets and also encouraged interest rates to decrease. Also. The fiscal easing.counter deflation: In response to the turmoil in economic and financial conditions. including unlimited U. residents stop spending. and providing enough liquidity to the markets. Major auto and electronics manufacturers have cut down on production. dollar funding. The new package is expected to generate an increase of 2% in GDP and 1. ii)Japan's Fiscal Policy $154. as fears of job losses loom. The plan includes measures to (a)create jobs. through its special fundssupplying operations to ease the corporate financing. Surely this will help pay back tax losses which are incurred now and in the previous stimulus package. Due to this. will help create new employment opportunities the emergency small-business loan plan follows on similar measures taken last year in previous stimulus packages. (c) And ease corporate costs.

in order to encourage exports. this program constituted a violation of the GATT provision and was abolished in 1963. Import Policy (1) Customs Clearance Procedures The average time taken in customs clearance from import declaration to import permission in Japan has been shortened by reform of customs clearance procedures. the transaction is usually settled in the form that importer B issues a payment bill (similar to a check) to producer A in Japan.iii)Trade policy : Since Japan depends a lot on its exports. import tariffs paid on the input are refunded to producers at the time of export. (ii) Export-promoting financing (a) Pre-shipment export bill discount: When producer A in Japan exports goods to import to B in. However. Producer A brings the bill to a foreign exchange bank in Japan to receive money for his already exported goods. because the same value of sales in the foreign market brought more after-tax income than the value of sales in the domestic market. ~ 21 ~ . which gives producers a perk to export. Normally. the United States. (b) Japan Export-Import Bank In 1951. In Japan. (b) Import tariff refund When the Japanese producers import raw materials and intermediate goods to produce export goods. Export Contest In order to encourage export. say. the Japanese government set up ‗export contest‘ among firms to combine the benefits of competition and cooperation. preferential access to credit and foreign exchange are very attractive rewards. So all its trade policies are designed to promote exports. The government officials who have designed and supervised the contests were generally competent and impartial. (i) Export-promoting tax system (a) Special deduction of export income: In Japan exporters are allowed to subtract certain percentage of export income from their total income. However. the Japan Export-Import Bank was established to provide medium and longterm loans to shipbuilders and producers of plants (or mini-factories) whose major markets were those in foreign countries. the Bank of Japan rediscounted the bills at very low interest rate before actual shipment is made. But for competition to be successful reward s are necessary. the cash transaction is made after producer A completed the shipment of the exported goods.

Agreements do not seem to be a ‗testing ground‘ for wider liberalization. and the Government of Japan intends to continue to hold such meetings. WTO Members have maintained certain tariffs. quota is allocated to importers automatically calculated following calculations that are done according to a publically specified formula. To date Japan has approached the issue bilaterally. The Government of Japan has steadily implemented significant reduction of the tariff rates which was committed in UR. Indonesia and Korea. (2) Agricultural and Food Products Tariff levels of each country were determined by the Uruguay Round Agreement and the Japanese Government has been properly implementing the agreement. Developed APEC members have been excluded. 2001 which allows certain cargoes to be released prior to lodging of a declaration for customs duty payment. Negotiations continue with countries like Thailand. Such a redefinition of Japan‘s approach to regional integration to fit within the post-war GATT/WTO model may offer greater flexibility in negotiating with other countries. In the meeting. The Government of Japan has introduced "Simplified Declaration Procedures" in March. ~ 22 ~ . However. reflected in the accommodation of agricultural protection especially rice. Japan‘s strategy has an Asian focus and aside from Singapore.expanded introduction of computerized system and other measures.transparent nor that the standard was a trade barrier. Infrastructure and Transport and Japan Craft Inspection Organization held an expert level meeting March and December last year with the National Marine Manufacturers Association in order to promote mutual understanding. was friendly and constructive. (4)Wood Products and Housing Japanese Agricultural Standard (JAS) for wood products is a voluntary system for maintaining quality standard for wooden products that are distributed domestically which treats domestic products and import products equally. (3) Leather Japan introduced tariff-quota system for leather and leather shoes in 1986. accommodating Japanese Trade Policy and ‗Economic Partnership Agreements‘ Japan‘s new conventional step alongside the aspirations of ASEAN and China still remains a major challenge. In particular Japan realized the earlier policy could not reduce the growth of regionalism elsewhere and could not resolve the costs of non-participation. there was no indication of a claim neither that Japan‘s standard was non. The meeting based on technical knowledge of experts. then perhaps the Japanese conventional wisdom is filtered primarily through the lens of a redefinition of Japan‘s ‗Asia Strategy‘ rather than ‗complementing‘ the WTO. as per the GATT rules. If Japan‘s program with ASEAN countries is successful. Summary(Trade Policy): Japan‘s shift to free trade agreements shows a shift in conventional wisdom. by separating import declaration and duty payment declaration. all the countries are developing countries. In addition to this. Ministry of Land. leading to certain agreements with Malaysia and the Philippines and agreements with Mexico and Singapore. as per the WTO Agreement.

(4)require the President to certify which countries are manipulating their currencies and take remedial action if the manipulation is not halted. Japan has intervened (bought dollars and sold yen) in high quantities to counter the yen‘s appreciation.8% to an under-evaluation of 29%. For the last few years. It mainly has slowed the rise in value of the yen rather than reverse its direction of change. The intervention seems to have had little lasting effect. the yen has been continuously depreciating and is now at a 20-year low. The median value of these estimates is that the yen is about 15% undervalued.iv)Japan’s Currency Policy: The recent bold currency intervention made by the Japan has triggered global suspicion and unease. Periods of heaviest intervention also coincided with slower (not faster) economic growth rates for Japan. ~ 23 ~ . Japan‘s 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. The huge purchasing of dollars 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. but since March 2004. (2) clarify the definition of currency manipulation. the Japanese government has not intervened significantly. After Japan‘s intervention in the yen exchange rate by selling of billions of dollars. Private company estimates of the misalignment of the yen range from an overvaluation of 1. only a few people have a clear idea of what Japan has done and what kind of backlash will be felt. Japan decided to come back to its zero interest rate policy (ZIRP) at the beginning of October. (3) require negotiations and reports. Its economic complications do not only lie in the longterm money supply. 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. However. that quickly drew world‘s attention. In the past. Major policy options for government include (1) let the market adjust .

It is almost certain that any moderately determined central banker could do this. The movement through manufacturing sector is important because it leads to increase in output. at last. the Japanese find the real value of their huge holdings of cash falling sharply. (Whoever was responsible for allowing Japanese debt to be so short term when the government can borrow at incredibly low long-term interest rates seems utterly incompetent.CONCLUSION: From our analysis we see that Japan has gradually moved from agriculture to manufacturing to service sector like every other developed nation. investment also falls. Fourth. Third. at the prevailing price level. by expanding the money supply. if they fail to hit the target within two years. which in turn results in a fall in the overall economic activity. while informing the policy committee that all its members will be sacked. and.2 years. reducing the face value by 40 per cent of GDP. Zimbabwean for example. moving into a small primary surplus. particularly by a fall in the aggregate demand i. now the government raises taxes and cuts spending. Deflation and policies: Deflation is caused by a shift in the AD and AS curve. It did not jump any phase like India( India had a transition from agriculture to services) so there is not much of a problem. ignominiously. if he wanted to do so. Other things equal. and to borrow at interest rates which are below those available to private entities.) That would bring average Japanese maturities above the far more sensible UK level of 13 years. The solution to falling demand is stimulus.e. This is called the ―deflationary spiral‖. by direct purchase of public and private sector assets on a sufficiently large scale. The government takes the following steps in this regard: First.. or by expansionary fiscal policy to increase demand. the economy expands vigorously. Since this leaves productive capacity not fully utilized. So they buy real assets and consumer goods. after maturities have been extended. hire a central bank governor who knows how to create inflation – an Argentine. extend the maturity of debt to at least 15 years from the today‘s average of 5. In the new inflationary environment. generates high employment thereby increase the income and purchasing power of people. either from the Bank of Japan. How big a primary surplus is needed depends only on the relation between the real rate of interest and the rate of growth of the economy. ~ 24 ~ . So now the Japanese government buys back the outstanding debt at its new market price. there is a fall in how much the whole country is willing to buy. consumers have an advantage in delaying purchases and consumption until prices fall a little more. Assume that the government only needs to borrow to roll over its debt and the debt ratio stabilizes. That should raise the interest rate on JGBs to 5 per cent. The government should prod this along by giving the Bank of Japan an inflation target of 3 per cent. the market value of the outstanding net government debt would fall by 40 per cent. leading to further reductions in aggregate demand. As the price of goods is falling. Second. let us suppose inflation indeed goes to 3 per cent. instead.

Wages did not improve during the time of recovery from 20022007 and the advantage of improving productivity were mostly nullified by the companies profits. Despite of the ample liquidity. it again started to cut the rates due to the serious damages done by global economic crisis.5% but that was not significant enough and in late 2008. So. and normalizes the economy. Bank of Japan has tried zero-interest rate policy from 2001-2006 to counter the deflation and the stagnant economic growth. 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. As mentioned above. To add to its problems china has been constantly dumping goods. ~ 25 ~ . The main reasons for the falling wages in Japan are company-based unions. By extending maturities of debt. relative to GDP. Japan eliminates almost half of its outstanding debt. in the process. This is obviously the typical situation of ―Liquidity Trap‖ where the monetary policy loses its effectiveness significantly. the Japan‘s economy started to show some signs of improvement as rate started to increase to 0. Hence. One of the other major problem that Japan is facing is it high dependency on exports which it makes competitive by depreciating its currency. In 2006. Japanese economy has got trapped into the vicious cycle.So there we have it. People lose their purchasing power when wages fall. In this way. 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). its employment culture and an increase in the cheap non-regular workers which is unique to Japan. Japan faced a lot of problems during the economic turmoil due to the high amount of business it has with the US. banks are struggling to encourage the credit growth. But with international trade agreements this is no more a feasible option. it becomes clear that maintaining a gentle rise in the wages is very necessary in Japan to overcome this long-term deflation in Japan. 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. Monetary Policies like quantitative easing are not helping the economy to get out of this downward spiral. Japan has tried lots of measures to curb this deflation but the “Falling Wages” which is more particular in case of Japan is something which is making all these policies ineffective. moving from deflation to modest inflation. Also the fact that the US is not allowing it to depreciate its currency is making life difficult for them. Thus Japan would do good to adopt conservative policies(not to forget the Japan bubble burst of the 80’s from which till today it has not fully recovered) like India so that there is not too much of a fall during recessionary conditions.

and 2. The other one relates to the possible implications of balancesheet adjustments in the United States and European countries. Outlook: In the interim assessment report released after the Monetary Policy Meeting held on January 25 and 26. reflecting the improvement in the overseas economies. However. 1. According to estimates by all the country needs to do is generate. Hence. as well as Japanese firms‘ medium. mainly in industrialized countries.5 % for fiscal 2009. ~ 26 ~ . it is indispensible for Japanese firms to reach out to consumers in emerging economies. But the longer time taken. Meaning to say that the government of Japan has borrowed huge amounts of funds from the Japanese people.e. expectations of 3 per cent inflation and the public debt problem should not prevail. Japan has a problem similar to that of the US i. say. But most part of the debt is internal to the economy (in the case of US it is external debt. 2010. (2) the shift in relative bargaining power among the negotiating participants in favor of the developing countries. it has huge amounts of public debt.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. and (4) the increased emphasis on achieving ―fairness‖ rather than reciprocity in trade liberalization. the bigger the ultimate adjustment will need to be. thus a huge matter of concern). The first one consists of a possible upward 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 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. indicating that the Japanese economy was developing basically in line with the Bank of Japan‘s outlook which was released in October 2009. There are both upside and downside risk factors which must be taken into account in considering the outlook for the Japanese economy. In both Japan and the west the problem is of unmanageable public debt. This shows that Japanese economy is improving gradually. Due to the sluggishness in the economies of industrialized countries. (3) the proliferation of bilateral and regional free trade agreements in contrast to multilateral agreements. which have a rapidly expanding middle class. it will take some time for the Japanese economy accordingly to achieve a full-fledged recovery.1 % for fiscal 2011. the median of the Policy Board members‘ forecasts for year-on-year real GDP growth was minus 2.3 % for fiscal 2010.to long-term expectations of future economic.

pdf http://ideas. http://www.com/2010/03/18/business/global/18yen.boj.boj.htm http://www.in\ http://wpweb2.economist. http://countrystudies.nytimes.jp/en/type/release/adhoc10/k100126.or.pdf http://www. http://www.html ~ 27 ~ .com.economywatch.jstor.experiencefestival.pdf http://www.cmu.com.jp www. http://www.jp/en/type/release/adhoc10/k101028. http://www. http://www.or.co.or.tepper.repec.or.boj.mongabay.edu/faculty/mccallum/JapanMonPol2.or. http://www.jp/en/type/release/adhoc10/un1003d.boj.org/p/hst/hstdps/d05-99.mises.markit.boj.com/ www.com.boj.pdf http://en.pdf .wikipedia.boj.pdf http://www.boj.us.pdf http://www.pdf http://www.html http://ideas.jp/en/type/release/adhoc10/k101105.or.org/p/hst/hstdps/d05-99.jp/en/type/release/adhoc10/k100407.google.wikipedia.oppapers.Macroeconomics 9e www.com http://www.jp/en/theme/seisaku/kettei/index.org.United States Various Reports on Japan Economy http://www.repec.com.com.or.REFERENCES: DORNBUSCH FISCHER STARTZ.jp/en/type/release/adhoc10/k100317.org/journals/qjae/pdf/qjae8_1_2.org/wiki/Monetary_and_fiscal_policy_of_Japan http://www.html www.or.

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