Students Speak

A Curious Case from land of the Rising Sun- Japan

Talking about advanced economies, we usually mention Western Europe and North American nations. Then we talk about Scandinavia countries- Norway, Denmark, Sweden. And then there is Japan resting in solo in its own historic glory (Galápagos syndrome). Japan is a unique nation in purely economic terms- Country which is pioneer of the world and Asia in various fields of work, Country with a long history of providing technology and innovation to the world. Here is a transition of a country pegged to become no. 1, outshining USA, not so long ago to become the sick, tired old man of the world.

Japan in 2016 is crippled with sluggish demand and vicious cycle of debt-deflation syndrome. Much-hyped “Abenomics”- named after the current Prime minister’s Shinzō Abe economic policy of bold monetary stimulus, fiscal spending and structural reforms have failed to yield the required results. The country’s exports have now fallen for 10 consecutive months.Imports too are falling and tourism economy has taken a bit hit thanks to depression in western world. In absolute terms, Japan’s Economy is staring at same value as it were 20 years ago. In practice, it has lost 2 decades achieving a naught.

Japan is a perfect example of things going wrong way one after another. Japan magical growth was an exception in world economy post WW2 and nuclear holocaust. But post the famous assets bubble burst of original dragon of Asia in late 80s, things never seems to reverse in Japan. It lost almost 24% of national wealth in this period. At its peak Japan accounted for 40 percent of all the property value on planet, falling to about 80 percent now. Bad books of financial institutes never seemed to recover from it and NPA (Non performing Assets) touched an unprecedented levels. Policy makers since then have not been able to revive the economy and every economic technique and theory (Latest, being Negative interest rate) seems to almost miraculously fail in Japan from last 25 years.

To get a clearer picture, lets divide the discussion to two Broad Economic policy headings- Monetary and Fiscal.

Monetary Policy:

Central Bank of Japan, Bank of Japan,has tried all the tricks present in any economic book of the world to revive the economy with very less success. Structural problems were always there in Japan Monetary system but were overshadowed by the exceptional growth in had thanks to its export driven economy –Especially to USA and Russia in Cold war era. Low Inflation has been an headache whose cure is nowhere seen in vicinity of the policy framework.

Japanese yen fluctuation with respect to dollar is another concern for the central banker.

Quantitative Easing has been deployed by the central bank to pump money into the system by issuing the bond in the market at the favorable interest rate. This Structural shift in the strategy has been borrowed from Federal Reserve and EU bank to induce money into the economy and induce consumer spending.  This move hasn’t yet resulted in significant result because of the basic saving habits of Japanese domestic market.

 Fiscal Policy:

On fiscal front, Japanese government has been trying very hard to induce consumer spending to the break the cycle of Debt financing their Expenditure. Majority of tax revenues of the government is being utilized in paying the interest of the previous debt they have taken. This vicious cycle have made it impossible for Japanese policy makers to progress  ahead.

Traditionally Japanese are known for their saving habits even to an extent that it will be fair to call them frugal. Taxing system is something that’s being worked out currently. Coming 2017 VAT (value Added Tax) increase is the topic of discussion in the Country. Last 2014 VAT increase had significantly reduced the domestic spending something that’s the last thing the government wants.

Wage increases have been the main push that present administrative have been targeting since it came to power in late 2102.Government is proposing to lower the corporate tax by 2 % and is directing the Companies to pass on the benefits to the labors/Employees.

To conclude one can say that for aging Western Democracies like the U.S., watching what unfolds in Japan may be like looking into a crystal ball of our own economic future. With all its follies, Japan is still the world second largest developed economy and has a strong regional influence. Innovative and zealous Japanese have it in their DNA to make a comeback when things are at their worst. Samurai warriors are probably preparing themselves for that final knockout punch. Till then ,World is watching.



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