Analysis of the Business Environment and Economy of the Country - Assignment Example

Analysis of the Business Environment Contents Contents 2 Question 4 Introduction 4 Discussion 4 Background of the Japanese economy 4 Key policies under Abenomics 5 Objectives of Abenomics policy 7 Outcomes of the bold strategies 8 Conclusion 10 Question 2 11 Introduction 11 Discussion 11 The GDP 11 Interest Rate 12 Inflation 12 Unemployment 13 UK government objectives 13 Conclusion 16 References 18 Bibliography 20 Question 1 Introduction The economy of Japan experienced a drastic change with the bold reforms in the macroeconomic policies undertaken by the present Prime Minister Shinzo Abe. The unconventional policies have become well known as Abenomics. There are mainly three aspects of the set of policies taken by Mr. Abe which includes a bold easing of the monetary base, bringing about flexibility in the fiscal policy and to introduce a strategy for growth. The daring steps in the formulation of the monetary policy have been taken in order to contain the deflation in the country. Despite the continuous efforts of the government the yield of the bonds issued by the government of Japan has remained more or less static and low. On the other hand the net public debt of the economy of Japan is as high as 134 % of the GDP. This is one of the highest levels of public debt out of the advanced economies of the world. In such a situation the Abenomics policies of 2013 to bring about a surge in the growth rate of the country and to bring about inflation in the country is considered to be having a lot of uncertainty and is dependent on the proper implementation of the strategies. This report is an analysis of the key measures under the policies, the main objectives as well as the long term implications of the policy. Scholarly resources have been consulted extensively in order to conduct the research and to draw appropriate inferences. Discussion Background of the Japanese economy In the post world war period Japan experienced spectacular growth of the economy. During the 1960s, 1970s and 1980s the average rate of the economy had been 10%, 5% and 4% respectively. The country moved to being one of the advanced economies. However, Japan witnessed a burst in the assets bubble in the early 1990s. There was an economic slowdown which resulted in a high level of unemployment in the country. Adding to this there was a huge amount of deficit in the budget which occurred due to the ventures of the government to finance the projects related to public works in the country. However the stagnation in the economy could in no way be stimulated by the different infrastructure projects. In order to battle such an economic situation the Japanese government took policy measures that would take out the speculative part of the surplus liquidity from the stock markets as well as the real estate markets. These policies led the country into a phase of intensive deflation during the phase of 1990 to 2004 (Arslanalp and Lam, 2013, pp. 12-16). Due to the policies the economy recovered once again but the deflation still persisted. At the time of the financial crisis which had hit almost all the countries of the world, Japan experienced a loss in the level of GDP by 0.7% in the year 2008 and about 5.2% in the year 2009. On the other hand the growth rate of GDP of the country was negative in 2009. The volume of international trade in the country also suffered a decline of 27%. Key policies under Abenomics The policies under Abenomics comprise of mainly three strategies which are better known as the “three arrows” (Itoh, 2013, pp. 2-3). The three pillars are Bold monetary policy Flexibility in the Fiscal Policy Strategy to induce growth The prime minister intended to take a bold monetary policy through the introduction of quantitative easing as well as increasing the level of spending on the public expenditure along with the attempt to devalue yen. The Bank of Japan intended to undertake a strategy of Quantitative Easing through this policy. The bank would be buying assets from the open market worth $ 1.4 trillion so that the money supply in the economy increases. This would be clubbed with the strengthening of the level of competitive environment in the economy of Japan. In order to have a flexible fiscal policy under the Abe regime, the government would try to control and align the level and the amounts of the yearly incomes as well as the yearly expenditures. The country had experienced massive destruction in some places where the earthquake had taken place. The government through the flexibility in the fiscal policy would attempt to create a supplementary budget whose main motive would be the restructuring the areas and the infrastructure damaged by the natural disaster. This was a part of the emergency measures that the government was to undertake to have a proper management of the economic policy and to enable a surge in the growth (Patrick, 2013, pp. 5-8). In order to execute the third arrow successfully, there were several areas where special attention was to be provided. First of all the industry regeneration was to be promoted because at the present scenario the economy of Japan is mainly dependent on the services sector, which contributed major part of the GDP of Japan. Secondly the government would try to reinforce the pool of workforce in the economy through proper generation of a system of employment (Kingston, 2013, pp. 2-4). Thirdly, the specific business locations of the country have to be made more competitive from a global perspective. Fourthly in the energy sector there is a need to have an optimal allocation and supply of energy with proper management of the needs and the supply. Fifthly the government is of the opinion that the growth of the economy would surge if the people are healthy and have greater longevity. Thus the government would take measures that would protect the citizens on this aspect. Clubbing with this the government also has the motive of promoting the exports of the economy by the creation of a competitive environment. Finally the government agenda also included the development of technology which is considered to be an area of core competence for the economy. Objectives of Abenomics policy The chief objective of the Japanese government was to combat the challenges that had cropped up due to the global financial crisis and to stimulate the growth rate of Japan which had remained stagnant over the period of time. According to the economist like Krugman, there was a need for the economy to have higher inflation expectations in Japan. This was to be done by internally increasing the monetary base of the economy rather than the printing of the notes. The quantitative easing is a policy that is being taken to overcome the rate of deflation in the economy and to achieve a level of growth that would be sustainable in the long run. The government expected that with the rise in the rate of inflation the economy would be able to achieve a level of stability in the prices. The government with these set of policy tools intends to incorporate a sense of urgency in the economy that would help in the strengthening of the growth in a sustainable manner. Under Abenomics the government in the first round of the policy changes tried to take rapid action through the emergency measures. These measures were taken with the objective of reconstructing the huge damage caused by the natural disaster in the country and as a part of the disaster prevention and management system of the country was made more concrete. The infrastructure of the country which was resilient in nature was also addressed in the process (Ito, 2013, pp. 17-29). The flexibility in the fiscal policy would be brought about by the government in order to point out the areas where there is potential of sustainable growth. The government has a future outlook here. The purpose for this is also to have a alignment of the monetary policy with the fiscal policy in Japan. In other words, the Bank of Japan should work in tandem with the government of Japan. Thus the aggressive measure of the central bank was in conformity with the policy taken by the government (Bank of Japan, 2013, pp. 12-17). The growth strategy has been taken so that the government is able to take Japan to a position where it would be considered as a place which is most conducive place for conducting business especially for the foreign investors. The motive of Abe Government is to generate employment in the economy through the growth of business and industries along with the development of information technology in Japan. Thus there would be a target for improvement of the wealth in the economy. The promotion of the small and medium scale industries would also add to the growth. Outcomes of the bold strategies The immediate result of the bold policy measures was a turnaround for the stock markets of Japan as well as the fall in the exchange rate of yen. The bank of Japan in its attempt to have a bold monetary policy, introduced monetary easing into the economy. Within six months of the policy changes in autumn 2012, Yen depreciated against US dollar and the Japanese stock exchange Nikkei started rising. These outcomes proved that the fact the new policy was actually becoming effective. Figure 1: Changes in Nikkei Source: KPMG, 2013, p. 3 Thus the Abenomics policies have a mixed response in the country. Under the policy the economy is expected to witness an increase in the public investment due to the allocation of funds for the supplementary budget. The disaster prevention measures would act as a positive measure both from a societal as well as an economic point of view (Aso, 2013, pp. 8-9). As a part of the fiscal policy measure the increase in the consumption tax would result in a bust in the market for housing properties. This would affect the middle income group of the economy. Thus the economy would anticipate an increase in this rate of consumption tax rate. Hence as a response to this the government intends to incorporate a preferential rate of taxation for those who intend to purchase home. The government had an intension of encouraging investments of Japanese companies outside the country in order to have a competitive environment. Since the domestic market is slowing down, a number of companies in the construction and infrastructural development sector are concentrating on the developing economies outside the country when the returns would be much more. Since the country has a competitive advantage in the technological knowhow there would be opportunity for the businesses to have decent market share and dominant presence. Hence the foreign emerging markets like India, Brazil or China would be prospective investment destinations for these businesses. This would help the companies to have a proper competitive position with respect to the other advanced economies like the US. Conclusion The set of policies taken by Prime Minister Abe has been criticised from different spheres. The opposition party in Japan is of the opinion that the attempt to increase the rate of inflation in the economy would result in the fall the real wages of the economy. The present salary of the employed people would also increase very little as a result of this. However, Abe defended his position stating that this kind of policy would be able to inject potential for growth in the economy. Another group of critics have stressed on the fact that the policy is more inclined towards increasing the aggregate demand of the economy rather than managing the supply side. Since a huge percentage of the population of Japan comprise of aged people, the labour market of Japan is actually contracting which may pose a problem for the economy. Again the attempt to devalue the currency of Japan may result in currency wards which would hamper the international competitiveness. However, there are enough evidences to prove the success of the policies taken by Prime Minister Abe. The devaluation of the currency would result in increase in exports in the country. The increase in the operating profit of the Japanese giant Toyota by 86% supports the fact (Irwin, 2013, p. 1). Question 2 Introduction An economy may undergo changes if there is any alteration in the macroeconomic variables. These are mainly four key variables which are of prime importance. This report analyses the theoretical aspects of the key variables. In the later part the changes of these variables in the light of the UK economy has been considered. The government policies taken at present through the changes of these variables have been analysed to provide an insight into the practical aspects of the theories. The report has been prepared with the help of the scholarly resources like books, journals and online newspapers. Relevant charts have been provided to provide a better understanding of the issues. Discussion The GDP The GDP is one of the major indicators of the performance of a particular economy. In common parlance, GDP is considered to be the sum of the economic activities that take place in an economy within a given time frame. There are two ways in which GDP can be defined. GDP is the total income of all the entities in a particular economy. Again GDP may be considered as the sum of the expenditures on the goods and services of the economy. The growth rate of GDP is the rate of increase in the GDP of a country from the previous phase of time. The higher the growth rate the faster the economy is moving towards development. The growth rate of GDP has an effect on the aggregate demand of the economy and is hence related to the other economic variables. Most of the governments of the countries try to implement policies that would increase the rate of growth of GDP in the economy. Since the output of the economy is directly related to the standard of living or the income or the other factors of the economy it is important for the government to maintain a stable rate of growth of output. Interest Rate The rate of interest is used as one of the most prominent tools for the implementation of the monetary policy in the economy and directly affects the level of investment in the economy as well as the other macroeconomic variables. This particular macroeconomic variable manages the purchasing power over a period of time. This means it is the opportunity cost that the borrower pays to the lender for holding the money at the present time period. While nominal interest is considered in terms of money that the banks would pay, real interest rate is considered in terms of the purchasing power of goods and services (Blanchard, 2000, pp. 75-123). Inflation The rate of increase in the price level of the economy is known as inflation. The rate of inflation affects the price level of the goods and services in the economy in the short run as well as in the long run. This means that a single unit of the currency of an economy would be able to buy less of the commodities. In other words rise in the rate of inflation would imply a corrosion of the purchasing power of the economy. Inflation in an economy is caused due to excess liquidity or supply of money in the economy. While inflation pushes up the opportunity cost of having money in hand, the rate of investment in the economy may suffer a setback due to the expectation of the people about the future inflation. If the level of inflation is low the labour market is adapt more quickly to the pressures of economic recessions. Unemployment Unemployment in the economy would have an effect on the income of the household and in turn on the aggregate demand of the economy. It has a direct impact on the people living in a country adding to the psychological distress. The aim of the government of every country is the achievement of full employment in the economy (Mankiw, 2002, pp. 155-159). In times of recession a country generally experiences very high levels of unemployment. Unemployment rate however is inversely related to the level of inflation in the economy. Thus inflation is seen as a barrier to the increase in the unemployment in the economy. UK government objectives The economy of the United Kingdom has been undergoing a period of turmoil with a number of reasons for the imbalances in the macroeconomic environment. Thus it is important for the government to continuously monitor and take policy measures to tame such a situation. The major problems that the government of UK was facing were in regard to the rising debt of the households as well as the problems in the housing market. The competition that the economy faced from the external environment had added to the adversities. The country witness a fall in the shares of the exports to the other countries due to the intensifying competition. UK experienced a continuous phase of trade deficit due to this. The GDP of the country has remained low in 2012 which was less than what the GDP of UK was when the financial crisis was at its peak. Thus the performance of UK in comparison with the other advanced economies has been worse in 2012. The current account balance of UK also experienced corrosion. This has happened due the lack of the demand for the products of UK from the foreign countries as well as the drop in the income in the foreign countries. The real GDP of the economy declined due to the fall in the consumption by the households as well as the decline in the private spending. People preferred to hold on to the cash rather than invest it. In the year 2011 the rate of unemployment in the economy had been 8.3% which reached its peak. This resulted in the weakening in the aggregate demand which in turn resulted in the fall in the GDP. Since the start of the financial crisis period in 2009, the employment in the public sector had been decreasing on a continuous basis. As on September 2012, about 5.75 million people were unemployed in the economy (European Commission, 2013, pp. 15-18). However, the country witnessed positive trends in the private sector services, both in the business as well as the consumer sectors. This resulted in the recovery in the labour markets. Activities of hoarding in the labour market, surge in the part time employment as well as the weakening in the real wages have resulted in optimistic labour market. However, the productivity of the labour in the economy is a phenomenon as a result of the fall in the GDP of UK. The rate of inflation of UK was at the peak in the year 2011 at a level of 5.2%. It declined to 2.2% in 2013. This happened as a result of the rise in the prices of the general commodities. The rising prices would require the people to have an increase in their incomes. However, the feeble consumer demand would push the inflation rate to a low level. Figure 2: Inflation in UK Source: Thompson, 2013, p. 1 Along with this the Eurozone crisis has an effect on the liquidity of the economy. In the phase between October 2008 and March 2009, the base rate was reduced drastically from 4.5% to as low as 0.5%. This is the present base rate offered by the Bank of England. On the other hand the European Central Bank reduced the rate of interest to 0.25% in its attempt to inject liquidity into the system. Figure 3: Comparative Chart of Rate of Interest Source: Harari, 2013, p. 1 With little scope for the reduction in the rate of interest Bank of England adopted the monetary easing policy by purchasing assets from the open market. As a part of this policy, the bank bought assets worth 375 billion pound. This was done with the objective of injecting liquidity into the system. Figure 4: Supply of Money in UK Source: Harari, 2013, p. 1 In the recent policy measures the Bank of England has maintained that it would be wise to maintain the base rate at the same level rather than raising it till the employment scenario of the country improves. According to the practitioners this would not take place till 2016.The policy also includes a contraction in the quantitative easing to $ 75 billion from the previous rate of $ 85 billion per month. Conclusion Thus it can be seen that UK takes policy measures to contain the levels of distress in the economy through the adjustments in the key macroeconomic variables. Since the rate of interest in the UK economy has hit very low levels the policy of Quantitative easing policy is one of the measures that the Bank of England has taken which can help the country move out of the trap that UK is presently in. The problems of debt of the economy have to be addressed by the policies of fiscal consolidation with efficient planning and the changes in the tax structure of the UK economy. In other words the deficit in the budgets has to be tackled in a proper manner along with the maintenance of a proper condition of liquidity in the economy. References Bank of Japan, 2013. Financial System Reports, April 2013.[ pdf] Available at http://www.boj.or.jp/en/research/brp/fsr/data/fsr131023a.pdf [Accessed on 29 Dec 2013]. KPMG, 2013. Abenomics Brief. [pdf] Available at http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/Abenomics%20Brief.pdf [Accessed on 29 Dec 2013]. Kingston, J., 2013. Critical Issues in Contemporary Japan. Oxon: Routledge. Patrick, H., 2013. “Abenomics: Japan’s New Economic Policy Package.” Centre for Japanese Economy and Business, Occasional Paper Series, No. 62, pp. 5-8. Aso, T., 2013. What is Abenomics? Current and Future Steps of Japanese Economic Revival. [pdf] Available at: http://www.mof.go.jp/english/public_relations/statement/others/20130419.pdf [Accessed on 29 Dec 2013]. Ito, T., 2013. Abenomics. [pdf] Available at: http://www.jef.or.jp/PDF/20130712_1_presentation_Prof.Ito.pdf [Accessed on 29 Dec 2013]. Itoh, M., 2013. On Abenomics and the Japanese Economy. [pdf] Available at: http://www.esri.go.jp/jp/workshop/130530/data/3_2Motoshige_Itoh.pdf [Accessed on 29 Dec 2013]. Irwin, N., 2013. Toyota is crushing it. Abenomics is the reason. The Washington Post. Available at http://www.washingtonpost.com/blogs/wonkblog/wp/2013/08/02/toyota-is-crushing-it-abenomics-is-the-reason/ [Accessed on 29 Dec 2013]. Arslanalp, S. and Lam, W. R., 2013. “Outlook for Interest Rates and Japanese Banks’ Risk Exposures under Abenomics.” IMF Working Paper, Vol. 13/2013, pp. 12-16. Blanchard, O., 2000. Macroeconomics. Englewood Cliffs: Prentice Hall. Mankiw, N. G., 2002. Macroeconomics. New York: Worth Publication. Harari, D., 2013. Interest Rates and the Money Supply: Economic indicators page - Commons Library Standard Note. [pdf] Available at http://www.parliament.uk/briefing-papers/SN02802.pdf [Accessed on 29 Dec 2013]. Thompson, G., 2013. Inflation: Economic Indicators page - Commons Library Standard Note. [pdf] Available at http://www.parliament.uk/briefing-papers/SN02792.pdf [Accessed on 29 Dec 2013]. European Commission, April 2013. Macroeconomic Imbalances: United Kingdom 2013. [pdf] Available at http://ec.europa.eu/economy_finance/publications/occasional_paper/2013/pdf/ocp143_en.pdf [Accessed on 29 Dec 2013]. Bibliography Colander, D. C. and Gamber, E., 2006. Macroeconomics. Cape Town: Prentice Hall. Heijdra, B. J., Ploeg, F., 2002. Foundations of Modern Macroeconomics. New York: Oxford University Press. Arnold, R. A., 2008. Macroeconomics. Mason: South Western Cengage Learning. Abel, A. and Bernanke, B., 2005. Macroeconomics. London: Pearson Education. 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