The economy of Japan is constantly recovering gradually. The Real GDP increased annually by 3.9% quarterly from January to March. Japan recorded a positive growth for the second quarter which is primarily attributable to the private demand due to the increase in the growth rate. In terms of the components of demand, the private consumption increased quarterly for the third quarter (Taussig 2013). The capital expenditure is having been gradually increasing with inventory investment witnessing upward surge in GDP for the first time in three quarter following the slower corporate inventory adjustment. However, on annual basis, the economy of Japan grew by only 1 per cent which is considered to be much weaker that the initial estimates of 2.2 per cent expansion after a 1.2 percent growth in December quarter of 2016.
GDP Growth Rate of Japan:
During the month of March in 2017 the economy of Japan has advanced by 0.3 percent on quarterly basis which is regarded as below the preliminary estimates of 0.5 percent expansion but at the similar speed as in the earlier quarter. Making an upward revision in the capital expenditure was unable to offset a weaker private consumption (Frank, Bernanke and Lui, 2015). On annual basis the economy of Japan has only grew by 1 percent which is much lower than the preliminary estimations of 2.2 percent expansion and after a 1.2 percent growth in the quarter of December 2016. The average GDP growth rate of Japan aggregated around 0.50 percent from 1980 until 2017 and reached an all time high of 3.20 percent during the second quarter of 1990 (Sloman, Norris and Garrett 2013). Japan also recorded a lower GDP of -4.80 percent in the first quarter of 2009.
Figure 1: Figure illustrating GDP of Japan
As mentioned the Japanese economy experienced a growth of 0.3 percent on quarterly basis during the month of March in 2017 however, the upward revision in the capital expenditure was not able to offset the weaker private consumption. In comparison to the December quarter of 2016, the domestic demand increased by 0.1 percent however the preliminary estimate was 0.4 percent (Bernanke, Antonovics and Frank 2015). The private consumption comprised of around 60 percent of the economy which increased by 0.3 percent which is down from a preliminary estimates of 0.4 percent in comparison to the flat reading of the last quarter and contributed 0.2 percent in the expansion of GDP. Public spending did not made any contribution to the growth of the economy (Tradingeconomics.com. 2017). The consumption of the government was flat from 0.1 percent in the preliminary estimation in comparison to the increase of 0.1 percent in fourth quarter.
The private non-residential investment and capital expenditure grew by an approximate of 0.6 percent which is regarded as 0.2 percent quicker than the preliminary estimations and followed a 1.9 percent increase in the fourth quarter. The capital expenditure contributed 0.1 percent points to the economic expansion of Japan. The private residential investment increased by 0.3 percent which is regarded as weaker than 0.7 percent in the preliminary figure following a 0.4 percent growth in the fourth quarter (Stiglitz et al. 2013). In the meantime, changes in the private inventories fell by 0.1 percent points from the average quarterly rise.
The net export only added 0.1 percent points to the economy of Japan which remained unchanged from the initial estimation since the exports of goods and services expanded by 2.1 percent from a rise of 3.4 percent in the fourth quarter (Schmidt 2017). On the other hand, the imports increased to 1.4 percent after a growth of 1.3 percent. On annual basis, the economy of Japan increased by 1 percent which is much lower than the initial estimations of 2.2 percent growth after a growth of 1.2 percent during the year of 2016 in the December quarter.
Aggregate Supply and Aggregate Demand Model:
Considering the aggregate supply and aggregate demand model the economy of Japan is assumed to be at full employment. If the rate of income taxes is increased in Japan then the level of unemployment will increase. With higher instances of income taxes workers would be receiving less income in their each pay check. As a result workers will be able to spend less and this will result in decreasing consumption in the Japanese economy and investment with decreasing GDP Japan.
As a result of this the decrease in GDP will lead to a shift in the aggregate demand curve to the left side. A new point of equilibrium will be established at the lower economic output level and lower employment rate in the society. Given that the rate of employment rate decreases the unemployment rate will increase.
Figure 2: Figure representing Aggregate Demand and Aggregate Supply Model
Japan Q4 GDP Growth Below Expectation:
The economy of Japan expanded by 0.2 percent during the fourth quarter of 2016 after attaining a growth of 0.3 percent during the previous period and lower than the market anticipations of 0.3 percent as per the reports obtained from initial estimates (Tradingeconomics.com. 2017). It was regarded as the fourth successive quarterly growth that is boosted by exports, government expenditure and non-residential investment whereas the household consumption was even (LeRoy and Werner 2014). In comparison to the third quarter of the year, external demand contributed 0.2 percent points to growth since the export of goods and service grew by 2.6 percent whereas the imports increased for the first time in a year by 1.3 percent after a fall of -0.2 percent in the third quarter.
The non-residential investments bounced back by 0.4 percent whereas the public investment declined to 1.8 percent after a fall of -0.7 in the third quarter which ultimately did not made any contribution to growth (Arena and Quéré 2016). On annual basis the economy of Japan rose by 1 percent in the fourth quarter of 2016 after an upward revision of 1.4 percent growth in the earlier period which is below the expectations of 1.1 percent growth. It is noteworthy to denote that the this was the fourth successive quarter of expansion that is led by the external demand.
The economy of Japan fell at an annual rate of 1.4 percent during the fourth quarter of 2015 which is considered as blow to the Prime Minister of Japan. Several economists has projected a decline of 1.2 percent however the figure that appeared was worse than expected due to the sharp fall in consumption (Weber 2017). The statistical data puts forward that the economy of Japan is continuously affected by the weakening of social and domestic demand as it enters a fourth year of record monetary stimulus with wages are not rising at a faster rate so that it can persuade the consumer to spend.
There is no symbol of downward spiral in the economy however with the rising of yen to trade at Y 113.8 to the current trade of dollar the figures put enormous amount of pressure on the Bank of Japan. Investors on the other hand is anticipate more growth as the stock market clawed back sharply following a heavy fall with Nekkei closing 7.16 percent higher being one of the biggest gains. Economist have pointed out that consumers are saving with the expectation of increase in consumption tax in the coming year (Bigsten 2016). Struggling with the Abenomics growth for the entire year of 2015 was only 0.4 percent after recording a zero percent growth in 2014. This is roughly in accordance with the Japan’s long-term growth which suggests that little progress has been made in terms of the capacity of the economy that is necessary in driving the inflation upwards.
The growth of the third quarter has been revised previously after a yearly fall of 0.8 percent to a yearly rise of 1.3 percent after escaping technical recession. The consumption during the fourth quarter fell at the yearly rate of 3.3 percent. The public investment also fell down representing a fiscal stimulus on the commencement of Abenomics which turned into austerity after a reduction of 10.3 percent. Business investment experienced a good quarter after an annual rise of 5.7 percent. A positive contribution was made from trade even though there was slowdown in China (McCombie and Thirlwall 2016). Export fell down at a yearly rate of 3.4 percent driven by the falling price of oil and commodity with imports falling at a faster rate. Few weeks ago Banks of Japan surprised the market by cutting down the rate of interest to -0.1 with the effort of presenting its commitment so that it generate an inflation of 2 percent. Price rise is presently running very close to Zero.
In spite of the actions of BOJ weakness in the world of economy has further led to weakness in the world economy that resulted in additional appreciation of yen. The strengthening of Yen has made it harder to depend on the exports and business investment acting as the engine for the economy. The figures obtained in the fourth quarter highlights that the consumption at home is not willing to take up the slack (Rafindadi and Ozturk 2016). Since Abenomics has struggled, growth for the entire year of 2015 was around 0.4 percent after a zero percent growth in 2014. The figures obtained is in accordance with the long term probable growth of Japanese economy that suggest that there was a very little progress in the capacity of the economy which is necessary to drive the inflation upwards.
Japan GDP Declines by 6.8% on Rise of Sales Tax:
The falling of Japan GDP in the second quarter was unexpected since the country absorbed an increase in the sales tax. Hike in the sales tax during the last quarter pulled the economy of Japan in the biggest contraction which kept the policy makers under intense amount of pressure to expand the fiscal and monetary stimulus (Jorgenson and Vu 2016). The April 1st hike in the sales tax undertook a huge amount of toll on the household spending which shrink the world’s third largest economy by a yearly rate of 6.8 percent commencing from April to June. The hike in the sales tax wiped out the growth of 6.1 percent witnessed in the month of January to March since customers went on shopping so that in avoid the incidence of higher taxation. According to the median market reports it projected a drop of 7.1 percent drop. The background to such drop is Japan has very much witnessed no economic growth for more than two decades. The standard of living is still growing even though the country has witnessed mild deflation (Greiner, Semmler and Gong 2016). But those together have resulted the government debt to 240 percent of the GDP.
A large portion of this has been owed domestically in Yen but it is currently supportable however a large amount of tax revenue is required so that it can balance their books of accounts and make way for debts. But this results in next problem of reducing the debt something which is financially contradictory without hampering the growth of the economy. The policy of tax is necessarily in contraction as the government is doing through the consumption of taxation which has cut down their growth instead of other forms of taxation. Income, capital and company taxes cut down the growth in large proportion similar to the revenue collected than the consumption of taxation (Calder 2017). In the mean time the government is running a massive expansion policy where 75% of all the government bonds issued are purchased by the government.
Household sector and Private Consumption:
Even though the consumption of the real private sector increased at an annual rate of 1.5% during the January to March for the third successive quarter of expansion but the speed has been relatively slow. The real purchasing power has been slow and the sentiments of the customers have been dull following the hike in the consumption tax in the last April. The weakening of consumer sentiments has been of late slowly improving. The activities of the household sector in the survey of confidence have been improving following a decline in the end of 2014 (Alper and Oguz 2016). According to the expectation of economist it is assumed that the private consumption will rise slowly with an improvement in the real income.
The real residential investment increased at an annual rate of 7% during the quarter of January to March reflecting first expansion in four quarters. New housing commenced from bottom during the mid-2014 since the effect of reactionary drop in the surge of demand was ahead of the hike in consumption tax. The residential investment computed in terms of the investment made has reflected a positive environment (Bhattacharya et al. 2016). Increase in demand ahead of the next consumption tax hike will be key factor in increasing the investment in 2016.
Figure 3: Figure representing real private consumption
Aggregate Expenditure Model:
The relationship between the aggregate expenditure and real GDP is considered as simple one but it is highly important. Consumer spending forms the largest component of the aggregate spending that accounts for around two-thirds of the total. Consumptions relatively depends upon the household income. However, at any level of income, the willingness to consume is dependent on numerous factors including the household wealth, the interest rate, and consumer anticipations.
The Japanese banks are facing trouble due to the increasing loans of real estate that resulted in the collapse of the real estate market. The drop in consumption has resulted in reduction of aggregate demand that triggered Japan’s worst economic slide in decades. During July 2016, car sales dropped by 6.4% and electronic purchase further falling to 4.8%. The output of Japan has declined successively for three quarters in a row.
Figure 4: Figure representing the Aggregate Expenditure Model of Japan
The real public demand fell down at an annual rate of -0.9 percent in the first quarter of January to March representing a first decline in four quarters. The final consumption expenditure of government has been on constant rise due to the increased medical expenditure and care cost as the benefit. However, the public investment has been on a constant decline due to the early implementation of the financial year 2013 the supplementary budget has taken around (Koo and Perkins 2016). This has created an overall public demand and the supplementary budget of the financial year 2014 passed in the month of February is anticipated to support the public investment. However, the budget is focussed on increasing the private demand by supporting the household sector and the corporate incomes with the budget for public investment is less than the size of the financial year 2013 supplementary budget.
The Japanese Yen has been gradually weakening against the USD as the USD/JPY touched 125.80 for the first time since June 2002. Nevertheless, the US-Japan long term yield has been supported the weakening of JPY which has remained at almost same level. Anticipations of wider US-Japan yield spread because of the diverging directions of the monetary policy in the two countries are partly dictating the movements of the market (Rousseau and Wachtel 2017).
Looking forward, the JPY might fluctuate in the next few months depending upon the timing of the hike in the US interest rate and speculation concerning the speed of interest rate thereafter (Alper and Oguz 2016). Considering the long term viewpoint it is anticipated that the JPY weakness to gradually take root due to the diverging directions of US and monetary policy of Japan. Furthermore, the Japanese long term yields are most likely to remain low due to the BOJ’s enormous monetary easing. The US long term yields are anticipated to keep raising because of the medium to long-term anticipations of the inflation with steady growth anticipations.
BOJ leaves Monetary Policy of Japan Unchanged:
The bank of Japan has left its key short-term rate of interest unchanged at -0.1 percent in its meeting of June 2017. Policy makers have kept their 10 year government bond yield target around zero percent and have even provided more upbeat view on the private consumption and international economies. The BOJ is determined to purchase the exchange traded funds and real estate investment trust of Japan in order to increase their outstanding amount at an annual speed of around JPY 6.0 trillion.
The economy of Japan has been turning towards the moderate expansion with overseas economies have continued to experience growth at a moderate speed. Speaking on the domestic demand side, business fixed investment has been increasing moderately. In regard to the outlook, the Japanese economy is likely to turn into a moderate expansion.
Figure 6: Figure illustrating Japanese Money Market
The report successfully highlights the falling GDP since the economy of Japan at an annual rate declined by 1.4 percent in the fourth quarter of 2015. The report highlighted the actions of BOJ weakness in the world of economy that has further led to weakness in the world economy that resulted in additional appreciation of yen. Furthermore, the report stated that the falling of Japan GDP in the second quarter was unexpected since Japan absorbed an increasing sales tax. To conclude with, the report has presented that the real purchasing power has been slow and the sentiments of the customers have been dull following the hike in the consumption tax in the last April.
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