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Economic Performance of Japan

Question:

Discuss about the Past, Present, and Future of Economic Growth.

One of the predominant economies in the global framework, which has shown immense growth and impressive development trends over the years and has developed phenomenally despite all the fluctuations and downturns time and again, is the economy of Japan. Being an island of 378,000 square kilometres, Japan is one of the most developed market economy in the global framework, ranking third globally in terms of nominal GDP and also ranking fourth in terms of the purchasing power parity (Hughes, 2013). The island country enjoys an extensively developed manufacturing as well as service sector and is the proud owner of the largest electronics commodity industry in the world and is counted as the third largest manufacturer of automobiles in the world.

Over the years, the economy of Japan has been subjected to considerable fluctuations and dynamics, owing to the geographical and locational vulnerabilities and the huge natural calamities which have occurred in the country over time. Disasters like that of the Great East Japan Earthquake (2011) as well as the Tsunamis have led to widespread destructions of the economy of the country as a whole. Apart from the natural disasters, the country has also been subjected to various economic and commercial phenomena like that of the Global Financial Crisis of 2008, which had immense negative implications on the economy of the country (Lockwood, 2015).

The country has however, managed to overcome these crisis with time, much of which can be attributed to the technological advancements and increased capabilities of the people of the country to adapt to different situations. Japan is considered to be one of the most innovating countries in the contemporary global framework and is known to compensate its lack of natural resources and oil or gas by their technological infrastructures (Dore, 2013). However, the country has been experiencing a decrease in the population and a relative aging of the same, with 27% of the total population of the country being over 65 years (2016) (Cook & Halsall, 2012). Keeping these aspects of the economy of the country into consideration, the following section tries to analyse the economic performance of the country in the time span of 2007 to 2016.

The growth and development of a country consists of development dynamics of different aspects of the country, of which the economic growth is of utmost importance as much of the welfare of the residents of the country depends on the attributes like their income status, standard of living, employment scenario, the facilities which they enjoy, the advantages which they are entitles to get from the government as well as the stability in the economy of the country (Morrison, 2012). Thus, it can be asserted that the economic development and performance of a country over the years can be analysed by observing the trends of the different economic indicators like productivity, employment and inflation statistics. Keeping this into consideration, the economic performance of Japan can be observed and analysed as follows:

Primary Indicators for Economic Growth

One of the primary indicators of economic growth which is widely used in the global framework is the Gross Domestic Product of the country, which shows the total value of the commodities and services produced within the geographical boundaries of the country within a particular span of time, which is usually considered to be one economic year. The GDP of Japan can be seen as follows:

However, the Nominal GDP does not show the actual productivity growth as it cannot differentiate between the rise of GDP due to increase in output and increase in price. In this aspect, the Real GDP acts as a more authentic indicator of economic growth of a country, as it measures the growth of output by keeping the price levels same as that of the base year taken (Rodrik, 2014).

As is evident from the above figure, the Real GDP of Japan has been subjected to huge fluctuations in the first part of the time span (2007-2016). The most notable drop in the growth variable was found to be in 2008-2009, which can be attributed to the Global Financial Crisis which occurred in the international economic scenario at that point of time.

The slump in the Real GDP growth of the country was a ripple effect of the Financial Crisis which started as a sub-prime mortgage crisis in the United States of America in 2008 and percolated to almost all the major economies in the country. The effects were considerably felt in the economy of Japan as the stock prices fell drastically, which was also related with the loss of productivity of the economy (Ando & Kimura, 2012). The inflow of investments as well as sales of the Japanese commodities and services to other parts of the world were hampered significantly. The economy went to a severe recessionary period with the businesses suffering immense loss and stagnation. 

However, the Real GDP of the country started recovering post 2010 and the same has maintained a more or less positive trend in the current period (post 2010) as can be seen from the above figure. However, the Real GDP of the country cannot show the individual welfare of the people living in the country, for which the Per-Capita Real GDP has to be considered, which is as follows:

From the above figure it can be seen that barring the period of acute economic crisis (2008-2009), the country maintained a more or less positive (though moderate) in the per-capita GDP over the last few years. However, the per capita GDP is seen to be comparatively low as compared to the huge numbers which can be seen in the GDP of the country. This is due to the increased population and population density of the country and an increasing share of economically non-productive old age population in the country (Katagiri, 2012).

As can be seen from the above discussion, the productivity of the economy of Japan has been compromised for several times, including the periods of 2008-2009 and also in 2011, due to the massive earthquake which took place. To combat these situations and to take the economy on a constant path of progress, the government has primarily taken various policies which are mainly of the type of expansionary fiscal policies (Baker, Bloom & Davis, 2016). Both after the period of Global Economic Crisis as well as after the earthquake of 2011, the government has employed policies of low tax rates and has also initiated rigorous and aggressive policies to promote innovations so as to improve the productivity in the economy. Over the years the trade relations of Japan have grown substantially as can be seen from the following figure:

Fluctuations in GDP and Real GDP

The country has increased its exports considerably post the crisis period of 2008 and has the same has maintained a more or less stable pattern despite the trivial fluctuations (Kajitani, Chang & Tatano, 2013).

The performance of any economy also depends on the dynamics in the labour market of the economy which not only have implications on the productivity of the country as a whole but also affects the economic welfare of the employers in terms of employment, wages, work conditions and standard and quality of life enjoyed by the same (Atkinson & Storey, 2016). Keeping this into consideration, the labour market performance of the economy of Japan, within the period of 2007 and 2016, can be seen with the help of the following economic indicators and their trends over time:

The economic welfare of the residents of a country is primarily measured by the employment scenario in the country. Higher the rate of unemployment of the country, lower is the economic welfare of the residents of that country.

The unemployment rate of Japan, which rose to a considerable extent in 2008, is seen to be decreasing noticeably after 2009, with the rates being as low as 3% in 2016. The strikingly high rate of unemployment in 2008-2009, can be attributed to the loss of jobs in the economy attributed to the Global Financial Crisis of 2008.

In general, there exists different types of unemployment in a country:

  1. a) Frictional Unemployment- The type of unemployment which is transpired in the existence of phenomena like lay-offs and job switches in the labour market of an economy is known as frictional unemployment. This unemployment includes the transitory period between leaving a job and settling in a new one. An economy with high frictional unemployment indicates towards a lack of presence of job satisfaction and high job switching tendencies of the individuals in the economy.
  2. b) Structural Unemployment- A more prolonged type of unemployment is the structural unemployment as it arises primarily due to permanent events like shift in technological patterns and similar factors which leads to redundancy of the skills of many workers, thereby leading to their lay off. These workers do not get absorbed in mainstream employment easily. Thus, structural unemployment has more negative implications than any other form of employment (Goodwin et al., 2013).
  3. c) Cyclical Unemployment- The type of unemployment which occurs in an economy during the slow-downs like depressions, recession and natural calamities. Though mass unemployment occurs due to these types of incidents, however, the effects are mostly short term and the labour market of the economy re-stabilizes soon.

The labour market in Japan mostly faces structural unemployment due to the continuous innovations in the economy which in turn leads to the creation of more capital-intensive industries and demand for human capital which in turn keeps on displacing labours from their employment (Pecc.org, 2018). Frictional employment is not that frequent in the economy of the country due to the presence of robust government policies and also high employee loyalty. However, Japan often faces recessionary situations due to the geographical vulnerabilities of the country. These often leads to high cyclical unemployment, which however are mitigated with time.

The primary reason behind the low frictional unemployment of the country is the presence of robust employment policies in the scenario, including that of the “Simultaneous Job-Recruiting for New Graduates”, which enables the new graduates of the country to get absorbed in the workforce. However, the frequent occurrence of natural calamities hampers the employment sector substantially. The government of Japan, however, proves to be efficient in terms of disaster management, employment promotion and creation of new temporary job scopes even in these periods of crisis, which include jobs in medical services, emergency services and reconstruction of the destroyed infrastructure.

The economic welfare of a country and its residents also depend on the price level prevailing in the economy in general, which is measured by the inflation rates in the economy. Inflation shows the increase in the price levels in a country with time. Inflation can be of two types:

Demand Pull Inflation- When the price of commodities and services increase in an economy due to excessive increase in the aggregate demand in the economy, then the type of inflation occurring in the economy is known as the demand-pull inflation.

Per Capita Real GDP of Japan

Cost push Inflation- The price of commodities may also increase due to the increase in the cost of production of the same, which may be attributed to the increase in the cost of the raw materials and factors of production. This type of inflation is known as cost push inflation (Bose, 2012).

The fluctuations however attained peaks during 2008 and 2014-2015, the former one being due to the Global Financial Crisis. The second one however, was an outcome of a planned policy implementation on part of the government to take the economy out of the deflationary situation of 2010-2013.

The effect of inflation on the residents of a country can be seen with the help of the Consumer Price Index, which is a measure of the weighed mean of the prices of a commodity basket, consisting of the usual necessary goods and services used by the resident of the country.

As is evident from the above figure the CPI rose substantially post 2014, due to the initiative taken by the government of Japan to come out of the deflationary situation and is considered to be temporary. However, according to some economists this hike in the price level, if continues for a prolonged period can lead to cost push inflation, thereby hurting the economy as a whole and its residents.

Apart from a few fluctuations, the country has mostly gone through a state of deflation, which is also hurting to the economy as acute deflation indicates stagnancy in demand and supply, thereby taking the country on the path of a recession. The government has responded in terms of implementation of monetary easing strategies. However, during 2008, when the inflation went considerably high, the contractionary monetary policies taken by the government successfully brought down the inflation. However, in the current period, not much success is being observed in terms of the policies taken by the government in terms of fighting deflation (BBC News, 2018).

Conclusion

From the above discussion it can be seen that the economy of Japan has been subjected to considerable fluctuations, attributed to the natural disasters as well as the economic crisis faced by the country over the time. The economy was badly affected by the Global Financial Crisis of 2008 as well as the Earthquake of 2011. However, the efficient government policies have helped the country to come out of those economic downturns. However, the country has been fighting deflation for quite a long period of time and the extreme measures taken by the government in this aspect brings the threat of a cost push inflation in the future, if not controlled appropriately.

References

Ando, M., & Kimura, F. (2012). How did the Japanese exports respond to two crises in the international production networks? The global financial crisis and the great east Japan earthquake. Asian Economic Journal, 26(3), 261-287.

Atkinson, J., & Storey, D. J. (Eds.). (2016). Employment, the small firm and the labour market. Routledge.

Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring economic policy uncertainty. The Quarterly Journal of Economics, 131(4), 1593-1636.

BBC News. (2018). Japan inflation rate at 23-year high. BBC News. Retrieved 31 March 2018, from https://www.bbc.com/news/business-27615551

Bose, S. (2012). Inflation: Sources, Challenges and Policy Options. Economic and Political Weekly, 27-30.

Cook, I. G., & Halsall, J. (2012). Aging in Japan. In Aging in comparative perspective (pp. 37-45). Springer, Boston, MA.

Data.worldbank.org. (2018). GDP (current US$) | Data. Data.worldbank.org. Retrieved 31 March 2018, from https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?end=2016&locations=JP&start=2007

Dore, R. (2013). Flexible rigidities: Industrial policy and structural adjustment in the Japanese economy, 1970-1980. A&C Black.

Goodwin, N., Nelson, J., Harris, J., Torras, M., & Roach, B. (2013). Macroeconomics in context. ME Sharpe.

Hughes, C. W. (2013). Japan's economic power and security: Japan and North Korea. Routledge.

International Monetary Fund. (2018). Imf.org. Retrieved 31 March 2018, from https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/ADVEC/WEOWORLD/SRB/JPN

Japan Inflation Rate | 1958-2018 | Data | Chart | Calendar | Forecast. (2018). Tradingeconomics.com. Retrieved 31 March 2018, from https://tradingeconomics.com/japan/inflation-cpi

Kajitani, Y., Chang, S. E., & Tatano, H. (2013). Economic impacts of the 2011 Tohoku-Oki earthquake and tsunami. Earthquake Spectra, 29(s1), S457-S478.

Katagiri, M. (2012). Economic Consequences of Population Aging in Japan: effects through changes in demand structure(No. 12-E-03). Institute for Monetary and Economic Studies, Bank of Japan.

Lockwood, W. W. (2015). Economic Development of Japan. Princeton University Press.

Morrison, C. J. (2012). A microeconomic approach to the measurement of economic performance: Productivity growth, capacity utilization, and related performance indicators. Springer Science & Business Media.

Pecc.org. (2018). The 26th Pacific Economic Community Seminar. Pecc.org. Retrieved 31 March 2018, from https://www.pecc.org/resources/labor/1873-examining-the-mid-and-long-term-structural-unemployment-in-asia-pacific-session2-japan-united-s/file

Rodrik, D. (2014). The past, present, and future of economic growth. Challenge, 57(3), 5-39.

Tradingeconomics.com. (2018). Japan Exports | 1963-2018 | Data | Chart | Calendar | Forecast | News. Tradingeconomics.com. Retrieved 31 March 2018, from https://tradingeconomics.com/japan/exports

Tradingeconomics.com. (2018). Japan GDP per capita | 1960-2018 | Data | Chart | Calendar | Forecast. Tradingeconomics.com. Retrieved 31 March 2018, from https://tradingeconomics.com/japan/gdp-per-capita

Tradingeconomics.com. (2018). Japan Unemployment Rate | 1953-2018 | Data | Chart | Calendar | Forecast. Tradingeconomics.com. Retrieved 31 March 2018, from https://tradingeconomics.com/japan/unemployment-rate

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