Impact of Recession of Japanese Economy - Case Study Example

s s of Introduction Japan has the third largest economy in the world judging by the nominal GDP of the state, however the purchasing power indicators place Japan to the fourth largest world power. Also, various economic indicators further place Japan as the second largest economy of the developed world. Therefore, International Monetary Fund states that the per capita GDP of Japan equals that of $36,899 which is also 22nd highest in rank as per the data from 2013. Also, Japan is one of the members of Group of Eight, while its economy is regularly forecasted by Bank of Japan to get estimates (Ishi 2000: 11). However, owing to the fluctuating currency exchange rates, the GDP of Japan is often seen fluctuating. Also, Japan possesses the third largest manufacturing automobile industry in the world with the largest industry of electronics goods which also constitutes the innovative aspects of Japanese industry (Imrohoglu & Sudo 2010: 6). However, Japan also comes across rigorous competition from countries like South Korea and China in terms of manufacturing which is why it now focuses on high tech hybrid vehicles and the robotics industry. In addition, Japan also constitutes one of the largest creditor states, while it also possesses various assets around the globe. However, despite demonstrating such positive economic indicators, Japan isn`t completely immune to the global recession hitting the world economy, and thus the paper will discuss various aspects of recession which has affected Japan and also various steps which the state is taking to mitigate these losses. Impact of Recession of Japanese Economy Japan recently feel into the recession persistently globally, where one of world`s most strong economies struggled hard to shake off the receding impact of recession. The gross domestic products of Japan decreased to a striking rate of 1.6 % (annualized), however, which was the second drop leading to recession. Thus, the economy reacted by further contracting to an annualized 3 percent, as a result of which the stock of Japanese company also slumped drastically causing a blow to the economy. Furthermore, the weakest forecast was observed in the last quarter of 2014 with a real GDP growth estimate of 0.8%, which was the lowest so far. Therefore, the hiking sales taxes were a further blow to the already deteriorating economy, which was reacting to the global recession hitting all major world economies. While Japan hasn`t so much suffered from the housing crisis or toxicity in context to assets , yet in other respects, Japan has been hit harder than various EU states and even US. At one point, in 2008 (fourth quarter), the contraction in terms of GDP was double that US i.e. 12.1% contraction as against 6.3% contraction in USA (Iyoda 2010: 9). Economists further point out that the major reason behind the recession in Japan is the drastic drop in its net exports which have declined. Recession & Triangular Trade Theory Looking further into the reasons behind the recession, the concept of ‘triangular trade’ emerges which states that the advance economies including Japan, Taiwan and South Korea were exporting products to the developing countries like Vietnam, China or Thailand. However, these products were being assembled and exported to USA (Doi, hoshi & Okimoto 2011: 51). Therefore, the Asian states were naturally specializing in the low value adding processes where the advanced states were indulged in high value adding services. Thus, while USA decreased its imports, the entire triangular trade contracted as a result, creating a misbalance in economies. This explains why the global recession hit all these states involved when in 2006 the annual imports of US fell drastically (Sommer 2009: 9). For this reason, Japan being an important actor is directly affected by the import policies of the US, which also explains why the recession in Japanese economy was more extreme as compared to that of USA. Recession & Shift in Demand Sector Moreover, Japan majorly deals with exports in terms of capital and other consumer goods like cars, machinery, and components of heavy machinery (Koo 2008: 16). Thus, investments in the plants and the required equipments also dropped as a result of global recession. In addition to that, various household product purchases also declined due to the global downturn which led to constraints in liquidity and also diminished expectations. The demands of consumer have also shifted away from high end goods to inexpensive ones which explain the boost in businesses like Walmart (Otmazgin 2014: 43). Therefore, Japan was at a disadvantage at this point owing to the shift in the demands sector of the world. Also, thought the trade flows were late in bringing the recession to Japan, yet the severity was harder this time. The exports of Japan went unaffected until 2008, but while they begun dropping, the negative impact on the GDP was quite drastic. In addition, the yen also appreciated which reached around 2009% by January 2009, thereby affecting the trade drastically (Hatch 2010: 14). Economic Reforms in Japan – Responsive Measures to Recession Therefore, as mentioned above as well, Japan reaction firstly by appreciating yen, further considering corporate profits or tax revenues as a source to recovery. The increase in sales tax went up to around 8 percent eventually from 5 percent initially. A statement by Esturo Honda recently, who is one of the advisors to the Prime Minister, mentioned that in case the growth in third quarter would be less than 3.8 percent, the value added tax which is to be increased by 10 percent this year would be out of question (Rosenbluth & Theis 2010: 71). To overcome the crisis, Japan undertook various steps and a new economic direction, the outcomes of which are still to be observed completely. The official terms for fiscal reforms undertaken by Japan i.e. Abenomics incorporates various monetary policies, fiscal policies and also multiple economic strategies of growth to enhance private investment ventures (Ichimura & Klein 2010: 16) . The first policy which was implemented under Abenomics was that of monetary expansion, owing to which the inflation rate is falling considerably (yet the target hasn`t yet reached). The second step was increase in consumption tax which was postponed but may be implemented in the near future to reduce the deficits in the budget. In case the consumption tax hikes, the rise would be up to 10 percent as mentioned earlier as well, which aims at developing a fiscal surplus by a set date. (Ellington 2009: 19) Analysis Announced in 2013, this policy included various economic reforms which the government has already started implementing. As a result, there are reports indicating that Japanese economy has industriously rebounded from the ill effects of the recession. Therefore, an annualized growth up to 2.2 percent gave a boost to the economy, thought the global outlook still seems to deteriorate in terms of economy. However, the recovery is still fragile given the trend in consumers’ imports considerable soft. Also, the uneven trends of growth rely heavily on exports. Also, the Bank of Japan also now has room to pause the expansion in monetary policy which will affect the oil prices and also the inflation rates. In addition, quarterly increase of GDP up to 0.6 percent was also observed which results from the sales taxes hikes imposed in 2014. Also, since external demanded had also increased up to 0.2%, yen also managed to gather higher exports. Looking at the private consumption trends, they also rose up to 0.3 percent in the last quarter, thereby giving a boost to economy (Flath 2014: 53). Therefore, holistically speaking Abenomics has so far managed to pull positive indicators and out of all other alternatives tried in Japan, this one proved to finally pull Japan out of the deteriorating situation. Therefore, Bank of Japan finally pulled the plug off the deflationary policy which showing encouragement to various economic reforms. Also, considering that the Liberal Democratic Party of Japan assumed power and also that Prime Minister Abe again takes the office of PM, the commitment which Abenomics has so far managed to give can go a long way via implementing various fiscal reforms and growth initiatives (Berbaruglo 2014: 51). Recommendations Given the success of the Abenomics program and other reforms that Japanese government has adopted, it is pertinent to continue these measures to ensure that there are no hitches in the execution. In other words, the programs should be given time before they can be replaced with other programs. Yet, program evaluation should be made a constant part of the process so that amends can be made to ensure that the program is success. Also, the growth and reforms indicators must be put in place in such a way that they are realistic. Therefore, the pace of growth where Japan is at right now must be retained and exports and imports parameters should be set in such a way that further recession doesn`t struck the Japanese economy (Alison 2013: 41). Conclusion Therefore conclusively, Japan is one of the most aptly growing economies of the world with a very high GDP growth and a promising yet innovative manufacturing industry. However, the promise in the industry was what proved to be detrimental for Japan during the economic crisis. That is, in the aftermath of global economic crisis the demand for consumer good being offered by Japan declined. Also, the triangulation theory which explains how USA ends up acquiring the finished products developed by Japan, a decline in imports by USA also affected Japan`s economy drastically. As a response measure, Japan implemented the Abenomics model which proved to be a smart move by the government. The model included monetary expansion policy, tax hikes and also various economic reforms. Though substantial indicators to conclude success or failure of the policy are inconclusive till now, yet currently, Japan has managed to show a few positive indicators and thus the policy measured must be continued. Yet, global recession has hit Japanese economy hard and measures must be taken to improve the situation. Bibliography: ALLISON, A. (2013). Precarious Japan. BERBEROGLU, B. (2014). The global capitalist crisis and its aftermath: the causes and consequences of the Great Recession of 2008-2009. DOI, T., HOSHI, T., & OKIMOTO, T. (2011). Japanese government debt and sustainability of fiscal policy. Cambridge, Mass, National Bureau of Economic Research. http://papers.nber.org/papers/w17305. ELLINGTON, L. (2009). Japan. Santa Barbara, Calif, ABC-CLIO. http://ebooks.abc-clio.com?isbn=9781598841633. FLATH, D. (2014). The Japanese economy. HATCH, W. (2010). Asias flying geese how regionalization shapes Japan. Ithaca, Cornell University Press. http://site.ebrary.com/id/10457645. ICHIMURA, S., & KLEIN, L. R. (2010). Macroeconometric modeling of Japan. Singapore, World Scientific. http://public.eblib.com/choice/publicfullrecord.aspx?p=731170. İMROHOROǦLU, S., & SUDO, N. (2010). Productivity and fiscal policy in Japan: short term forecasts from the standard growth model. Tokyo, Institute for Monetary and Economic Studies, Bank of Japan. ISHI, H. (2000). Making fiscal policy in Japan: economic effects and institutional settings. Oxford [England], Oxford University Press. IYODA, M. (2010). Postwar Japanese economy lessons of economic growth and the bubble economy. New York, Springer. http://public.eblib.com/choice/publicfullrecord.aspx?p=603037. KOO, R. (2008). The Holy Grail of macroeconomics: lessons from Japans great recession. Singapore, Wiley. OTMAZGIN, N. (2014). Regionalizing culture the political economy of Japanese popular culture in Asia. Honolulu, University of Hawaiʻi Press. http://library.smu.ca:2048/login?url=http://muse.jhu.edu/books/9780824839062/. ROSENBLUTH, F. M., & THIES, M. F. (2010). Japan transformed: political change and economic restructuring. Princeton, N.J., Princeton University Press. SOMMER, M. (2009). Why has Japan been hit so hard by the global recession. [Washington, D.C.], International Monetary Fund. http://www.imf.org/external/pubs/ft/spn/2009/spn0905.pdf. Read More