Ib Economic Hl Commentary

The U.S. has reached the even level of inflation—not too hot and not too cold. The Japanese have endured a decade of near zero inflation ,and as of 2004, a outright deflation. However, the Japanese economy shows signs of climbing out of its funk based on it strong GDP showing.

To view a window into the future, take a look at Japan, where their population, who is advancing in age has brought the country’s once amazing economy to a standstill to the point where it will likely never truly recover.

Japan’s unemployment rate of about 4% opposed to the U.S. unemployment rate of close to 10%. Even the financial debt to GDP ration is an advantage, and debt in the private sector has not increased unlike the U.S. and European countries, (Time, 2009). In addition, since Japan is a huge exporter and with the U.S. demand going downward, the international balances and growth declined especially as the dollar value dropped and the yen surged. •

The U.S and Japan are both huge and powerful modern industrialized countries. However, both have similarities and differences in the way they function. First some general information about both countries. In Japan, you would make roughly around 29.7 percent less money every year compared to if you lived in the U.S. Also, if you lived in japan you would have a longer lifespan of about 5 years and consume 44 percent less electricity. If you lived in Japan, you would be less likely to be unemployed by about 43 percent with American unemployment rate being about 7.1 percent compared to Japans 4.3. However, overall if you lived in japan you are still 6 percent more likely to live below the poverty line with 16 percent of the Japanese population living below the poverty line compared to the U.S 15.1 percent.

Overall, Japan developed into an overall better country. “When the Meiji period ended, with the death of the emperor in 1912, Japan had established an elected parliament, a well- developed transport and communication system, a highly educated population free of feudal class restrictions, established and rapidly growing industrial sector based on the latest technology, and a powerful army and navy (afe.easia.columbia.edu).” Becoming a stronger army, navy and government was immensely essential. for Japan. “[They] pinpointed the need to create more flexible governing institutions that would enlist the abilities of men of talent, promote national unity under the aegis of the Heavenly Sovereign, and improve living conditions for everyone (willamette.edu).”

From 1952 to 1971, their GDP growth in a average is nine point six percent per year. From 1972 to 1991, the economic growth still average annual growth rate of four percent per year. There were many reasons caused this phenomenon, which were including the starting point of Japanese economy. The second world war destroyed the Japanese economy, killed millions of people, destroyed the 40 percent of the Japan's capital stock. Capital return rate was very high, so people had very strong and the investment and accumulation of more capital, it will naturally increase the growth rate of the economy. Second, Japan's high rate of investment and capital accumulation through the domestic savings rate, thus made the country's economic growth (Powell).

Real incomes for workers experienced slow growth from the beginning of the 1990’s to the present day in Japan. This has impacted savings rate as a large portion of the population do not have the finances to save effectively. This would account for low consumer spending regardless of the low saving rates. Reductions in labour productivity and issues with corporate competitiveness are two main factors behind this reduction in real incomes.

With the country’s current birth rate, Japan’s population of 127.5 million is expected to decrease by 25% within 35 years. The slowly shrinking country is also met with the problem that its population is also the oldest in the world, with over 25% of residents over the age of 65. These two facts combine to make a very unique and awkward situation in Japan in which no other country has ever been in before. Many changes are expected to occur in Japan, and efforts are being made to maintain the country’s economy, however its unclear if enough efforts are being made. I predict that In the future, Japan’s economy will be affected by its both declining and aging population, and certain government reforms are necessary to fix the population

The Japan real GDP growth was slowed down to +1.9% in Second quarters of 2014 compare to First quarters of 2014(+3.8%), due to mainly declining the exporting which also the main cause of the down turn of Capital investment in Automobile industry from 2013 where some of Asian countries are slowing down and export to US was also turned stagnant.

Shinzo Abe, Prime Minister of Japan, has declared the new economic policy package that proposes a key role for aggressive monetary easing, expansionary fiscal policy and structural reforms; these three arrows are described with the term Abenomics. In this paper we discuss the backgrounds of Japan’s economy the factors which flourished it, the period of stagnation and its reasons, the factors driving to introduce Abenomics and the logic behind it. We tried to reconcile the reasons behind the weakening of yen against the dollar and rising of stock market since the policy was announced. This paper makes major points; perhaps the most evident

Japan ranks as the third largest economy in the world as of 2010. The GDP at current prices in US dollars in Japan was reported at 5068.06 billion in 2009, according to the International Monetary Fund (IMF). Japan’s resurgence after World War II has however reached an inflection point in yearly 1989 after the burst of Japan’s asset price and real estate bubbles. As can be seen from the graph below, Japan’s GDP has hovered around the same level through more than 20 years of economic stagnation. The GDP’s slow growth has been exacerbated by the world financial crisis of 2008. A major landmark of Japan’s stagnation has been the BOJ’s fight against deflation.

Japan has very significant characteristics in terms of their economic power either in the Asia- Pacific region or around the world. After World War II the Japanese economy was deeply affected by shortages, inflation, and currency devaluation means that Japanese economy was bankrupt position. Therefore, Japan passed under the control of US in the post- Second World War period. From this point, economic transformation or recovery or development has started in Japan with the impacts of US and Japanese governments. Besides this economic aid, US also guided Japan in democratization and demilitarization whereas Japanese government had direct role dealing with those developments different from what happened in Germany at that

Japan enjoyed an Asia’s economic miracle that the world witnessed a country that started out poor and had become the second-largest industrial power during the postwar era. However, a large bubble economy had been irritated by the growth, especially in the stock and asset price markets, the economy suffered a near catastrophic crash caused by speculative mania(Hall and Von Wiesen, 2014). The Japanese economy has stagnated after the collapse of bubble economy. The economic situation has been in a wide deflation. In the last two decades, Japanese government took several measures to solve the deflation problem and spur the economy. There are fiscal expansion, conventional monetary measures, Yen depreciation, bank recapitalisation, Quantitative Easing, and three arrows of Abenomics. But the situation did not change much, the balance sheet of the country shows continuous economic recession.

Japan enjoyed a period of high productive development since the end of World War II. It boomed in the late 60’s and 70’s and then came to an immense halt in the 80’s and 90’s and still vacillating today. Since the beginning of 60’s, Japans growth has been called a “post-war economic miracle” (11). This is because, in that time, they had an “average growth rate of 10% in the 1960s, 5% in the 1970s, and 4% in the 1980s” (11). In this time, according to Richard Katz in his book “Japan: The System That Soured” the Japanese government applied a “developing country strategy” which involved very low interest rates so that Japanese companies, that during that time, needed money to start up their businesses, could take out loans at a extraordinarily cheap price (10). They also used a system called WAT. This system was “a peer-to-peer complementary currency system” (12) which would “allow for small businesses to issue IOUs (called WAT-ticket) to their suppliers” (12). This allowed for a “high-cost structure” (10) where “efficient manufacturers and inefficient service-related sectors” were able to “co-exist” (10).

As Walsh (2003) said that, ‘a social loss function dependent on inflation and output gap is the appropriate objective of monetary policy’ which indicates that the level of inflation and output are the major factors that affect monetary policy of all countries. Moreover, Castelnuovo and Surico (2010) claimed that inflation are the key elements to decided a monetary policy for a county. For the Japan economy, it experienced a disaster during the period 1986-1991, which named Japanese asset price bubble (Wood, Christopher, 2005). It leaded a long term economic depression japan after that. The main reason for the bubble economy is the extremely high inflation rate and output. As mentioned before, Japan was sustained a rapid development after world war II, the main industry of Japan is manufacturing industry. After the Plaza Accord