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An Insight into the Japanese

Economy

Submitted by :
Arsalan Ahmed
Submitted to :
Nabeel Latif
Submission date:
4/2/2016

Table of Contents
Overview of Japanese Economy............................................................................. 2
Growth................................................................................................................ 2
Growth rates....................................................................................................... 2
Size of the economy........................................................................................... 2
Demographics.................................................................................................... 2
Japan Consumer Price Index (CPI) 1957-2016...................................................2
Japan Inflation Rate............................................................................................ 3
Problems faced by Japanese Economy...................................................................5
Deflation............................................................................................................. 5
High Public Sector Debt...................................................................................... 8
Current Accounts Surplus:.................................................................................. 8
Cost of debt servicing......................................................................................... 8
Measures taken by Japanese Government to boost its economy...........................9
Implementation of the Three arrows of Abenomics............................................9
Boost economic growth through bold structural reforms.................................9
The top fiscal priority is reducing government debt while promoting social
cohesion.......................................................................................................... 9
End deflation................................................................................................. 10
Conclusion / Recommendations...........................................................................10
Boost economic growth through bold structural reforms..................................10
The top fiscal priority is reducing government debt while promoting social
cohesion........................................................................................................... 10
End deflation.................................................................................................... 11
Bibliography......................................................................................................... 12

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Overview of Japanese Economy


Growth
Despite four years of economic stimulus, Japans economy remains only 2.2 per
cent bigger in real terms than when Prime Minister Shinzo Abe came to power
promising massive structural reforms.
But while Japans government is pushing companies to increase investment at
home and raise wages to boost demand, stimulate the economy and escape
deflation, the pace of improvement remains subdued.
Q4 2015 GDP growth (QoQ)
-0.3%

Growth rates
Whereas initial figures had suggested that Japan had shrunk back into recession
in the third quarter, revised numbers suggest the country continues to grow.
While the changes have cemented the GDP datas reputation for unreliability, it
has also vindicated the BoJs decision not to ease monetary policy further in the
Autumn.

Size of the economy


Prime Minister Shinzo Abe has pledged to expand the size of the economy to
Y600 trillion. Recent growth in nominal GDP, driven by higher prices, is one of the
most encouraging signs of success for Abenomics.

Demographics
The decline in Japans population makes it crucial to measure GDP and growth
relative to the number of workers. By this measure, Japan has not done badly in
the last two decades.

Japan Consumer Price Index (CPI) 1957-2016


Consumer Price Index CPI in Japan increased to 103.20 Index Points in February
from 103 Index Points in January of 2016. Consumer Price Index CPI in Japan
averaged 73.06 Index Points from 1957 until 2016, reaching an all time high of
104.50 Index Points in October of 1998 and a record low of 18 Index Points in
February of 1957. Consumer Price Index CPI in Japan is reported by the Statistics
Bureau, Japan.

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Actual Previous Highes Lowest Dates


t

Unit

Frequency

103.2 103.00 104.50 18.00 1957 0


2016

Index
Points

Monthly

2010=100,
SA

In Japan, the Consumer Price Index or CPI measures changes in the prices paid by
consumers for a basket of goods and services. This page provides the latest reported
value for - Japan Consumer Price Index (CPI) - plus previous releases, historical high
and low, short-term forecast and long-term prediction, economic calendar, survey
consensus and news. Japan Consumer Price Index (CPI) - actual data, historical chart
and calendar of releases - was last updated on April of 2016.

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Japan Prices

Last

Previous

Highest Lowest Unit

Inflation Rate

0.30

0.00

25.00

-2.52

Percent

Inflation Rate Mom

0.10

-0.40

4.10

-1.10

Percent

Consumer Price Index CPI

103.20 103.00

104.50

18.00

Index Points

Core Consumer Prices

102.50 102.60

104.10

32.00

Index Points

Core Inflation Rate

0.00

0.00

24.40

-2.40

Percent

GDP Deflator

96.30

93.10

113.00

87.80

Index Points

Producer Prices

99.80

100.10

115.50

48.70

Index Points

Export Prices

103.20 105.40

207.30

94.00

Index Points

Import Prices

94.40

99.90

190.40

45.90

Index Points

Food Inflation

2.70

1.70

31.60

-3.70

Percent

Producer Prices Change

-3.40

-3.10

33.90

-8.60

Percent

Cpi Transportation

100.70 101.30

108.10

39.90

Index Points

Japan Inflation Rate


Japan's consumer prices increased by 0.3 percent on the year in February of
2016 after showing no growth in the previous month and beating market
consensus, as cost of food rose further while prices of transportation dropped at
a slower pace. Meanwhile, consumer prices in Tokyo, available a month before
the nationwide data, decreased by 0.1 percent in March from a year earlier; while
core consumer prices, which exclude fresh food, fell 0.3 percent, the biggest
decline in almost three years. Inflation Rate in Japan averaged 3.11 percent from
1958 until 2016, reaching an all time high of 25 percent in February of 1974 and
a record low of -2.52 percent in October of 2009. Inflation Rate in Japan is
reported by the Ministry of Internal Affairs & Communications.

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Problems faced by Japanese Economy


Japan faces low growth, rising government debt, large deficits and deflation.

Deflation
Lately, the word deflation has become almost synonymous with Japan and its
economic problems. As explained above, the deflation in Japan was a
consequence of rising aggregate supply while at other times of a combination of
cash-building deflation and bank-credit deflation. Changes in the money supply
tend to affect prices by way of changes in the overall volume of spending. A
simple formulation of this view appears as follows:
More money equals more spending equals higher prices, or conversely, less
money equals less spending equals lower prices. This can be represented by the
formula:
P=D/S

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where P is the average price level, D the aggregate demand in nominal terms
and S the supply of goods and services expressed in physical terms, all during a
given period. This is ascertained by studying the official records from when the
fear of deflation first emerged. To see how the Japanese economy developed
during the 19902001 period, we start by focusing on aggregate demand and
prices. When it comes to aggregate demand, the Gross Domestic Revenue
(GDR)measure of nominal spending will be used which differs from the widely
used Gross Domestic Product (GDP) measure in that it includes not only (i) gross
investment expenditure on fixed assets, but also (ii) gross investment on
inventories and work in progress, as well as (iii) the current business expenditure
that is charged off in the year it is incurred (as opposed to being amortized over
a period of years). These three items are together referred to as productive
expenditure. Table 1 shows the changes in GDR as well as the Money Supply (MS
measured as M1), the Consumer Price Index (CPI) and the Producer Price Index
(PPI).

From the GDR data we can single out 1993, 1998, 1999, and 2001 as years when
the aggregate demand fell, i.e., these were years of deflationary pressure. The
rest of the years should then be years of inflationary pressure. From the money
supply data, it appears that the Bank of Japan (BoJ) did its very best to make sure
that the money supply inflated during the period under consideration. Evidence
of this is the aggressively loose monetary policy conducted, including
consecutive rate cuts down to record low levels, as shown in Figure 1.

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When considering prices, we see that consumer prices fell in 1995, 1999, 2000,
and 2001, and rose in all the other years. Producer prices fell every year during
the period except in 1997 and 2000 when they rose. Overall prices seem to have
fallen in 1991, 1992, 1993, 1994, 1995, 1996, 1998, 1999, and 2001, i.e., all
years but 1997 and 2000. On top of that, prices of real estate have fallen every
year during the period and the average price of a share at the Nikkei stock
market has fallen by over 70 percent.
Apparently, deflation was caused exclusively by rising aggregate supply in 1991,
1992, 1994, 1995, 1996; i.e., there was growth deflation, since aggregate
demand was rising in these years. Deflation in 1993, 1998, 1999, and 2001 may
have been caused by any of the three causes under consideration, i.e., growth,
cash-building or bank credit deflation.

It is clear that one major cause of the Japanese problems has been the banks, so
it seems likely that there has been at least some bank credit deflation. At the
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same time, the possibility of rising supply as being a partial cause of the
deflation cannot be excluded.
Some support is found for the preliminary conclusion that rising aggregate
supply has caused deflation.

High Public Sector Debt


In 2013, Japanese public sector debt rose to one quadrillion yen ($10.28 trillion).
In 2013, this was 227% of GDP. This is significantly more than several European
countries like Greece (150% of GDP, Italy 112% of GDP, UK 77% of GDP).
In the most recent budget deficit, Japanese government borrowing accounted for
7% of GDP.

Current Accounts Surplus: Japan is running a current account surplus


attracting capital inflows into Japan; these can be used by the private sector to
buy government bonds. Japan doesnt rely on external financing of its public
sector debt. A high percentage of Japanese public sector debt is held
domestically. 70% is held by the Bank of Japan, most of the rest is held by
Japanese trust and investment funds. Despite a temporary inflow after the Euro
debt crisis, foreign sector holdings of medium- and long-term Japanese
government securities remained below 7%.
The Japanese private sector (both household and corporate) has a large appetite
for buying government bonds. This is because domestic savings are relatively
high. People and firms have spare cash to buy bonds and lend the government
money. In a country with a very low saving rate, there would be less people
willing / able to buy government debt. One concern that Japan has is that the
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domestic savings ratio is expected to continue to fall due to demographic


changes.
Cost of debt servicing. Interest rates and bond yields in Japan are very low.
(10 year bond yield is 0.5%) Therefore, the interest payments on the debt are
relatively low. If interest rates in Japan were to rise, the cost of servicing the
national debt would be much higher. Still debt interest payments account for a
substantial amount of government spending.
Japan has very low inflation and interest rates. The Bank of Japan is able to
monetise part of the debt without causing inflation because of the depressed
state of the economy. 70% of government debt is held by the Bank of Japan,
which in theory doesnt need repaying in the same way as to domestic savers.
Adjusting for effects of tax, the nationwide core consumer-price index rose 1.0%
in September, 2014. Analysts fear inflation could fall to 0.5% in 2015. A higher
inflation rate would help the Japanese economic recovery.
In recent years, the Japanese government has been caught between trying to
increase tax rates and increase the rate of economic growth. Unfortunately, they
conflict. But, if Japan is to see a fall in debt to GDP ratio, then strong economic
growth is a necessity.

Measures taken by Japanese Government to boost its


economy
Two decades of sluggish growth and persistent deflation have reduced Japanese
living standards below the OECD average. Gross government debt has risen to
226% of GDP, the highest in the OECD, driven by rising social spending and
inadequate revenues. Rapid population ageing is putting continued pressure on
public spending, while pushing down Japans potential growth rate to around
per cent. Abenomics bold monetary policy, flexible fiscal policy and a growth
strategy to revitalise the economy and end deflation had an immediate positive
effect in 2013, thanks to the first two arrows. Growth was interrupted in the wake
of the tax increase in April 2014, but resumed later in the year

Implementation of the Three arrows of Abenomics


Boost economic growth through bold structural reforms
Fundamental structural reforms the third arrow urgently need to be stepped
up to raise output growth, which is essential for fiscal consolidation and
improved living standards. The role of women is limited by a range of factors,
including their concentration in non-regular jobs and disincentives in the tax
system. Japan remains internationally isolated with the lowest share of inward
foreign direct investment (as a per cent of GDP) in the OECD area. Low rates of
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firm creation and exit reflect a lack of economic dynamism in the business
sector. Venture capital investment is at an early stage of development and the
small and medium-sized enterprise sector is lagging
The top fiscal priority is reducing government debt while promoting
social cohesion
With a primary deficit of nearly 7% of GDP in 2014, public debt remains on an
upward path. The impact of the high debt is mitigated by low long-term interest
rates, but weakening confidence would cause interest rates to rise substantially.
A run-up in interest rates would increase debt rapidly and destabilise the
financial sector and the real economy. Large-scale revenue increases are
indispensable, although this will tend to temporarily hold back GDP growth.
Constraining spending is difficult but crucial, given upward pressure on social
outlays, notably for health and long-term care, and the need to promote social
cohesion. Social spending, which is concentrated on the elderly, has only a
limited impact on income inequality among the working-age population, whose
relative poverty rate increased through 2012.This partly reflects the rising share
of nonregular workers, who are paid much less than regular workers.
End deflation
Persistent deflation has been a headwind to growth and has exacerbated the
fiscal situation by steadily reducing nominal GDP. The Bank of Japan has set a 2%
inflation target and launched quantitative and qualitative monetary easing,
boosting its balance sheet to 65% of GDP.

Conclusion / Recommendations
Effective implementation of all three arrows of Abenomics is required for the
success of the Japanese economy.

Boost economic growth through bold structural reforms


The top priorities in this regard are to:
Slow the trend decline in the labour force by:
Increasing female employment by expanding childcare, reforming aspects
of the tax and social security systems that reduce work incentives for
second earners and breaking down labour market dualism to reduce
gender inequality.
Expanding the use of foreign workers.
Participate in high-level trade agreements, notably the Trans-Pacific
Partnership and a Japan-EU Economic Partnership Agreement.
Improve the business climate to boost productivity growth by:
Upgrading corporate governance.
Promoting labour market flexibility and mobility.
Improving the entrepreneurial climate by ensuring second chances and
developing entrepreneurial education.
Revitalising venture capital investment to promote firm creation and
innovation.
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Reducing government support for SMEs to promote the restructuring of


viable firms and the exit of non-viable ones.
Moving to a more market-based agricultural system by measures such as
reducing commodity-specific payments to farmers, accelerating the
consolidation of farmland and reforming the role of agriculture cooperatives.

The top fiscal priority is reducing government debt while


promoting social cohesion
Set out a detailed and credible plan to constrain government spending and
raise revenues so as to achieve the target of a primary surplus by FY 2020.
Rely primarily on the consumption tax with a single rate and a broadening of
the personal and corporate income tax base to boost government revenue,
while raising environmental taxes.
Reform pension and health and long-term care to limit spending growth in the
face of population ageing.
Improve the targeting of public social spending and introduce an earned
income tax credit for low-income workers.

End deflation
Continue monetary expansion to durably raise inflation to the 2% target,
while monitoring risks.

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Bibliography
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5.
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7.

http://www.economicshelp.org/blog/978/economics/definition-of-deflation/
http://www.economist.com/node/18119075
http://www.economicshelp.org/blog/8968/uncategorized/cause-deflation
http://mises.org/sites/default/files/qjae8_1_2.pdf
http://www.economicshelp.org/blog/1178/economics/japanese-national-debt/
https://www.boj.or.jp/en/announcements/release_2012/k121030b.pdf
https://www.boj.or.jp/en/announcements/press/koen_2012/data/ko120217a1.p

df
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