Japan has a highly developed and market-oriented economy. Comparing its nominal GDP with the world, it is the third-largest. Japan has been known to be struggling with deflation from time to time. Currently, The japanese economy is currently on track for a record-setting growth streak. The manufacturer’s overall assessment of business conditions has improved for five consequent quarter, surpassing an 11 year high of +25, according to Bank of Japan’s December Tankan. In the third quarter of 2018, available data is showing that Japan is having a soft economic growth after the economy face recovery in the second quarter on the back of a surge in fixed investment. Although corporate savings have slightly decreased for the third consecutive quarter, it remained as support for business confidence and investment growth.
Based on the line graph, the Japan GDP has shown to have a gradual increasing pattern over the years since 1962. There were some GDP declines such as in 1965,1973 and a massive decline in 2008 which was caused by the Global financial crisis. This study will provide an analysis of the Japanese economy during their notable period which are in 1965, the 1973 oil crisis, the 1989 economic bubble and the 2008 financial crisis.
The macroeconomic analysis on the Japan economy development
1960- The year of import liberalization.
During the late 1950s, strict import controls were imposed to foreign products which were competing directly with domestic products. The regulations were such as limiting the allocation of foreign exchange and imposing import quotas. Sadahiro (1991) stated that the regulation has restricted foreign products to a limited amount that would be imported into Japan. During that period, the import liberalization ratio was approximately 40%, which is considered low. After being pressured from other countries, the japanese government finally increased the import liberalization ratio in April 1962, 89% in April 1963, and to 92% in August 1963. The import liberalization policies that the Japanese government implemented met the requirement for Japan to become the Article 8 nation of the IMF and join Organization for Economic Co-operation and Development (OECD) in 1964. Before the import liberalization policies were enforced, Japan was considered as a closed economy because of the restrictions on foreign imports. After the import liberalization, the japanese economy moved to the open economic system rapidly.
Due to the import liberalization and the Doubling National Income Plan, Japan experienced a further economic growth. The period was known as the “Iwato Boom” . However, it wasn’t long until the Japanese economy experienced a turning point. The first phenomenon was the stagnant growth rate on private investments. And after a short temporary recovery induced by the Tokyo Olympic game in 1964, the Japanese Economy faced the deepest recession since the War. The transition from labour surplus economy to the labour shortage economy was also one of the significant phenomenon during the Japanese economy development during that period. The wage increased due to structural changes in the labour market and consequently, caused a higher inflation in the low productivity sector and a stable inflation in the high productivity sector. This was also known as the “Productivity Gap Inflation”.
The 1965 Recession
It was in 1965 where Japan went into the most critical recessional year after the War. During that period, the policy that the government used was the balanced budget principle, but has shown to be ineffective. Consequently, the government resorted to the expansionary fiscal policy by issuing the deficit financing national bond. As a result of this fiscal stance, the Japan experienced a substantial economic growth in the latter half of the 1960s.
During the late 1960s, the Japanese economy experienced an average of 12% economic growth, the aggregate price was stabilized, achieved full employment, and higher ceiling of the external balance of payments. The most significant note is that the Japanese economy shifted to the external surplus economy. In September of 1969, due to the condition of external surplus structure, the money tightening policies were implemented in order to keep the prices at a stable rate.
During the 1960s period, there were certain economic policies implemented by the Japanese government to stimulate economic growth. One of the substantial policies used was the Fiscal Policy in 1965. The government had used the balanced budget principle with the national bond remain unissued until the 1965 recession. The government had issued 200 Billion yen worth of deficit financing national bond. By issuing national bond, the money stocks increased which directly increased income and stimulated consumption.
The graph model explains how Japan’s implementation of Fiscal Policy stimulated economic growth
During the recessionary period in 1965, the equilibrium interest rate and income was at A. Equilibrium A was when the Japanese government was still using balanced budget principle. After the expansionary Fiscal policy was implemented, money stock risen due the the issuance of national bond. It has resulted a shift of the LM curve from LM(M0) to LM(M1). The IS curve remained constant and reached a new equilibrium interest rate and income at B. Conclusively, the expansionary Fiscal policy has lowered the interest rate and increased the income, subsequently stimulated economic growth.
Some other notable policies implemented during the 1960s period were the Fiscal Investmen and Loan Program (FILP) , Special Depreciation Scheme, Monetary Policy and Low Interest Rate Policy
The 1973 Oil Crisis
In October 1973, the world faced what has been known as the 1973 oil crisis. The crisis began when the members of the Organization of Arab Petroleum Exporting Countries proclaimed an embargo. This was a problem because nations that were perceived supporting Israel during the Yom Kippur War became the target of the embargo. Japan was also one of the targeted nations. Consequently, the price of oil had risen from US$3 per barrel to nearly $12 globally by the end of the embargo in March 1974.
The oil crisis created massive confusion in the Japanese economy because the crisis happened when Japan was still facing an inflationary situation after the 1971 “Nixon Shock”. Yamakoshi,Atsushi (1986) inferred that the oil crisis critically weakened Japan’s oil-based structure especially heavy industries that are oil-dependent. It wasn’t just the oil price that increased but the wholesale price and consumer price followed the trend. The inflation caused by the Nixon Shock accelerated by the oil crisis, The increase in oil price also caused an international payment deficit. Since the oil crisis had massively changed the economic conditions worldwide, it was necessary for Japan as well to adjust economically to the 1973 oil crisis.
In December 1973, the Japanese Government finally imposed an aggregate demand reduction policy that implemented a constraint on the 1974 budget and increased the official interest rate from 7% to 9%. In terms of the trade deficit, Japan succeeded into recovery and expanded into a trade surplus from the April-June period of 1974. Subsequently, The whole Japanese economy shifted into recovery process in the second quarter of 1974. The recovery was realized because of private inventory adjustments and the implementation of monetary relaxation and government spending expansion policy.
The 1989 Economic Bubble
An economic bubble is trade in an asset at a price level that surpasses the asset’s intrinsic value. Japan experienced its economic bubble whereby the stock and property values skyrocketed due to a speculative mania. Japan’s Nikkei stock average soared to significant height in 1989, only to crush substantially shortly after. The crash caused the burst of their real estate bubble and implicated a massive financial crisis and an economic stagnation that went for a long period, which is now known as the “Lost Decades”.
The governmental measures taken in order to recover from the recession was crucial. The government’s message towards the public was to spend more and to save less,which was contrary to what they urged years ago before the economic bubble collapse. The Japanese government as well increased their expenditure on infrastructure buildings. However it was ineffective because during that period the government did not realize the magnitude of the severity of the depression. The tightening of the monetary policy had considerable effects on the economy. Monetary policies have been imposed such as implementing a low interest rate policy. And from 1995, it became a complete zero interest rate. Aside from that, the Japanese government founded the Cooperative Credit Purchasing Company (CCPC) to assist banks stem the severe effects of bad loans. Fiscal policies was also imposed during the Lost decade. Kristjansdottir (2010) stated that the Japanese authorities implemented counter-cyclical Keynesian policy. It is a policy whereby government intervention that would extend its effects to the private sector. The government spendings was increased and the tax rate reduced. The severity of the recession had push the government to introduce a total of nine fiscal stimulus packages to stimulate economic recovery. Capital injections was also done due to banking crisis by the latter half of the Lost Decade. The Banking crisis in 1998 and 1999 resulted into banks declaring inslovent, nationalized, merged and sold to private foreign investors.
Eventually, after numerous policies implemented and capitals injected, the Japanese economy gradually improved.it was generally believed that through a series of monetary policies, fiscal policies and capital injections, the japanese economy was on the path of recovery. The obstacles have been critical but through real structural reform, Japan’s economy seemed to be heading the right direction.
2008 Global Financial Crisis
The 2008 financial crisis is considered by majority economists as the worst financial crisis since the Great Depression of the 1930s. Specifically, Japan was severely suffered by the global financial crisis even though its financial system initially limited the impact of the crisis. Eventually, Japan went into recession in the third quarter of 2008. The net exports were negative, the GDP contracted severely. The Tokyo Stock market crashed as well as other stock markets worldwide. In the fiscal 2008, the Japanese economy decreased 3.3%, the trade deficit was ¥223 billion in November 2008 and GDP declined 12.1% October 2008. Although there were some growth at the end of the year, The Japanese economy contracted by 5.4% in 2009 and the unemployment rate rose to 5.7% in August 2009.
The Japanese authorities responded to the crisis by taking massive efforts towards recovery. Trillions of yen were injected into the money market by the Bank of Japan. The Japanese government implemented a total of three stimulus packages that contributed about 5% of GDP . More that ¥2 trillion was distributed to the public to encourage consumption. After numerous policy implementations and capital injections, Japan became one of the first and fastest country to recover from the global financial crisis. The economy grew by 1.7% in 2010. GDP expanded by 4.8% in the third quarter of 2009.
Since the starting of substantial economic conditions since the 1960s, Japan has implemented countless of economic policies to battle recessions, and those policies have proven to be effective. The notable ones were such as expansionary fiscal policy, monetary policy, and low interest rate policy. In the present decade, Major tax reforms were proposed for fiscal 2011 that would cut the corporate income tax to 35%, introduce environmental tax and the tax rate for small businesses would be reduced to 15%. Currently, Shinzo Abe, the Japanese Prime Minister introduced new economic policies to overcome deflation. The new economic policies combines fiscal expansion, monetary easing and structural reform. The objective of this policy is to stimulate domestic demand and GDP growth while raising inflation by 2%. The structure of the policy is aimed to increase competition, labor market reforms and expanding trade partnerships.