Economic growth of Japan after 1945 - Term Paper Example

? Economic growth of Japan after 1945 Contents Contents 2 Overview of the Japanese Economy 3 Data Representation 4 Solow Model Analysis 6 Data Analysis 8 Conclusion 9 Work Cited 11 Appendix 12 Name of the Student Name of the Professor Course Number Date Economic growth of Japan after 1945 Overview of the Japanese Economy After World War II, the Japanese government had undertaken strong initiatives to enlarge its technological skills. The government of Japan has increased its allocations in the development and progress of technology over time and has reduced its allocations for the defensive purposes. The manufacturers, suppliers as well as the distributers in the Japanese economy possess a strong interlocked structure. The jobs available in the country also assure a lifetime employment. However, the increased competition in the global markets and the series of demographic changes in the domestic economy of the country has increased the numbers of job losses and hampered the manufacture-supplier relationship in the country. The country has a subsidized and self-sufficient agricultural sector. As recorded in 2012, the country had a growth rate in real gross domestic product (GDP) of about 2%. The estimated real per capita GDP of the country was about $36900 as recorded in 2012 (“The World Fact Book”). The major sector of the economy that contributes a wholesome amount in its GDP is the service sector (7.5%) (“The World Fact Book”). The core competency of the country is its strong expertise in the state of technology (“The World Fact Book”). It has been analyzed by the economists and the researchers that this developed country (Japan) would show noticeable achievements in its state of economic affairs in the global market in future. Data Representation The context of this paper will explain the economic performance of Japan after 1945, in terms of its real interest rate and the net national savings. The researcher has utilized secondary data from authentic sites to conduct the quantitative analysis of the topic. Data from World Bank has been utilized to access the precise nature of the economy of Japan. Figure 1: Falling Nominal GDP in Japan over Time (Source: “World Bank”) The above graph shows the falling gross domestic product (GDP) of Japan from 1994 to 2012. The net national savings (NNS) of an economy is calculated from the difference between its gross national savings (GNS) and the rate of depreciation of the capital stock of the economy (Depr). NNS= GNS – Depr. Figure 2: Falling Savings in Japan over Time (Source: “World Bank”) In the above line diagram, the pink line clearly shows the fall in the net national savings rate in Japan over time. The real interest rate is the rate of interest which is experienced by an investor in the market after compensating for the loss from inflation. The real interest rate (R) is calculated on the basis of the Fischer’s Equation. This equation explains that real interest rate is the simple difference between the nominal interest rate (N) and the inflation rate in an economy (I). R= N – I. The inflation rate for an economy is again calculated from the consumer price index (CPI) of a country. CPI is the simple average of a particular basket of goods and services produced in nation. I = [CPI(this year) – CPI(last year)] / CPI(last year) (Baumol and Blinder 77). Figure 3: Real Interest Rates of Japan over Time (Source: “World Bank”) The above graph explains the real interest rate in Japan over the years. The entire quantitative data for the purpose of the research in this paper is taken on annual basis. The data table for the above line graph is given in Table 1 in the Appendix. Solow Model Analysis The Solow Model of growth is based on the concept of long run economic progress within the framework of neo-classical growth model. The neo-classical concept of growth states that a country can grow rapidly over time with the help of capital accumulation, population growth, technological progress and productivity. Figure 4: The Solow Model (Source: Gamber and David 232) The above graph shows the Solow Growth Model in an economy, where: Y= Gross National Product or Output in a country. K= stock of capital, k = per capita capital. L= stock of labor, l= per capita labor. I= Investment. As per the Solow Model (neoclassical economic theory), the economy of Japan had undertaken its growth policies by systematically enhancing and improving its technological expertise. However, it has been analyzed that at this phase of rapid economic growth in Japan, its labor supply could not cope up with its economic progress. In order to analyze the growth of the economy in Japan since 1945 with the help of Solo Growth Model, the depreciation of the stock of capital of the country, the shocks in the labor wedge and the technological progress is assumed to be constant. It is found that the economy of Japan had failed to progress technologically in the fifties. This is because the economy had lost a substantial stock of its capital resources in the war. Thus, it took a while for the economy to undertake the growth of its state of technology. In the era of 1960s and the early 1970s, the economy of Japan had to face strong income effects that were aggravated by the subsistence consumption level in the economy of the country (Gerlach and Wensheng, “Bank lending and property prices in Hong Kong”). This had helped the country to experience a steady economic growth in that period of time. However, the decline in the stock of labor force in the nation can also be explained as a result of this factor then. For conducting this analysis by following the concept of exogenous factors, the researcher has treated the technological progress as an adoption and not as an innovation. Owing to this factor, it is also believed that the technological progress in the economy of Japan was due to the diffusion of the research and development in the United States at that point of time. The labor wedge was the sole factor influencing the decline of labor supply in the economy of Japan over time (Anson and Butler, “Aligning the Interests of Agents and Owners: An Empirical Examination of Executive Compensation”). Data Analysis According to the view of the neoclassical economists, the technological progress seen in the economy of Japan should have facilitated the growth of its national product. Moreover, the technological progress in the country should have reduced the use of labor in its economy. However, this is not the real scenario in Japans economy. The service sector income of the country contributes to the majority of its national income. In the last few years, Japan also had to face a severe decline in its national income, net domestic savings and real interest rates. This is because in the real world, the idealistic view of endogenous growth does not exist. The global financial crisis in 2009 had significant impacts on the overall global economy. The crises of credit and fluid capital in the market have reduced the level of national income in the economy of Japan (Paul 47). The fall in the level of production capabilities have forced to reduce the national income of most of the countries (like, Japan) in the world after the global recession. The decline in the national income has therefore, resulted in a fall of the per capita income level of the country. The fall in the income level is in turn responsible for the decline in the net domestic savings in Japan (Mankiw and Taylor 132). As the gross amount of savings in Japan has fallen overtime, the amount of investment opportunities in the country has also declined. After the emergence of globalization and liberalization in the world economy, the prices of most of the goods and services in the market are determined by the free market forces of demand and supply. In the regime of the free market principles, the oil prices in the global economy have been soaring over the years. This is responsible for the rise in the cost of transportation and communication in business operations for most of the economies in the world. The rise in the cost of transportation in business is responsible for the price hike of most of the goods and services in the global economy. Thus, after 1990, the inflation in most of the goods and services in Japan and comparatively constant nominal wages have dampened the real interest rates in the country. The nominal interest rates have been reduced by the monetary authorities in the economy of Japan as the government has desired for a higher supply of money in the country. The lower interest rates have helped the investors to get access to easy credit in Japan. It was analyzed then that such low nominal rates of interests would help to increase the level of productive investments in Japan, which would in turn help the country to boost its national income. However, with time the crisis in the global market forced the monetary authorities of the country to increase its real interest rate in the recent years (Bose 132). The financial sectors of the country started to face severe losses when the number of failed out investment projects in the country started to rise. The provision of implicit bail outs given to the failed projects was responsible for a budget deficit in Japan. Contrary to the analysis by the neoclassical economists, the development of the state of technology did not help Japan to foster its growth in income after the nineteenth century (Holmstrom, “Moral Hazard and Observability”). This is because with the emergence of globalization, economies all across the world have become highly interrelated with each other (Ross, “The Economic Theory of Agency: The Principal's Problem”). Conclusion The paper firstly analyzes the economy of Japan in details. It goes on to concentrate on the real interest rate and the net domestic savings rate of Japan, as it tries to explain the precise condition of the economy at present. The paper has also thrown light on the performance of the economy of Japan (since 1945) on the basis of the Solow Growth Model. It has been analyzed that when the global commodity and money market are highly interrelated among different economies, then the concept of exogenous growth no longer exists. The economy of Japan has been experiencing a slow growth rate due to the crisis in the overall world economy. Despite the improvement of its core competences in the form of modern technology, the country needs to forecast the future outcomes in the global marketplaces and accordingly make changes in its state of economic affairs. Work Cited Anson, Mark and Bridgette Butler. “Aligning the Interests of Agents and Owners: An Empirical Examination Of Executive Compensation.” Ivey Business Journal, 2004. Web. 5 November 2013. Baumol, William Jack and Alan Stuart Blinder. Macroeconomics: Principles and Policy. Connecticut: Cengage Learning, 2011. Print. Bose, Chandra, D. Principles of Management and Administration. New Delhi: PHI Learning Pvt. Ltd., 2002. Print. Gamber, Edward and David, C. Colander. Macroeconomics. Pinelands: Pearson South Africa. 2006 Print. Gerlach, Stefan and Peng Wensheng, “Bank lending and property prices in Hong Kong.” Journal of Banking and Finance, 2004. 29, pp 461–81. PDF file. Web. 5 November 2013. Holmstrom, Bengdt. “Moral Hazard and Observability.” Bell Journal of Economics 10.1, pp. 4-29, 1979. Web. 5 November 2013. Mankiw, Gregory N. and Mark P. Taylor. Microeconomics. Connecticut: Cengage Learning EMEA, 2006. Print. Paul, Helen. The South Sea Bubble: An Economic History of its Origins and Consequences. London: Taylor & Francis, 2010. Print. Ross, Stephen A. “The Economic Theory of Agency: The Principal's Problem.” American Economic Review, 63, pp. 134-139, 1979. Web. 5 November 2013. “The World Bank”. The world Bank Group, 2013. Web. 5 November 2013. “The World Fact Book” CIA, 2013. Web. 5 November 2013. Appendix Table 1: showing the Real Interest Rate for Japan for 1961-2012 Year Real interest rate (%) 1961 0.20 1962 3.85 1963 2.16 1964 2.44 1965 2.53 1966 2.39 1967 1.72 1968 2.42 1969 2.85 1970 -12.23 1971 2.38 1972 1.36 1973 -4.90 1974 -9.68 1975 1.79 1976 0.23 1977 0.76 1978 1.74 1979 3.52 1980 2.76 1981 4.52 1982 5.67 1983 6.16 1984 4.92 1985 5.54 1986 4.17 1987 5.32 1988 4.69 1989 2.99 1990 4.50 1991 4.80 1992 4.49 1993 4.41 1994 4.01 1995 4.26 1996 3.23 1997 1.84 1998 2.38 1999 3.48 2000 3.36 2001 3.21 2002 3.47 2003 3.60 2004 3.16 2005 2.97 2006 2.82 2007 2.84 2008 3.22 2009 2.23 2010 3.85 2011 3.36 2012 2.31 (Source: “The World Bank”) Read More