The Japanese Economy - Case Study Example

The Japanese Economy Name Course Tutor Date Introduction Japan’ economy has been known to be among the stable economies around the globe for many years. It has been the second biggest economies after the US’s economy. Recently, it has been overtaken by China and now it is the third biggest economy. Its stableness is attributed to the culture of high technology, innovation and democracy; most of the high-tech tools and equipment around the world originate from Japan. Japan for a long time has been considered to be an important partner to the US in Asia (Whalen, 20-14, pp1).The US has largely depended on Japan on strategizing business matters in the Asian continent. Important figures in both Japan and the US have claimed that Japan upholds the balance of power in Asia and it will remain to be dominant democracy in Asia for a long time. All this reputation emanate from innovation and collaboration with the US as the largest economy around the world. This paper focuses on the Japan’s economy. It shows how the bank of Japan tried to manipulate macro-elements to stabilize its economy. It discusses the quantitative easing monetary policy as the main approach which BOJ adopted to curb the collapsing economy. Japan’s state of the economy  Critics argue that Japan can better be called the land of the setting sun. This means that its economic prowess is fading. They asserts that the assumption and thinking that Japan’s economy is stable is just a misconception since the facts from the past few decades proves that its economy is underperforming and this is why it has been surpassed by China (Whalen, 20-14, pp1). Most economists have measured Japan’s public finance and they have realized that Japan has the worst public finance all over the world. They point out that Japan’s total public debt is approximately 200% of the Gross national product (GDP). The public debt was only about 50% in 1980, after two decades, it moved from 50 to 200% (Westra, 2012, pp702).  ).The forecasts reveal that the public debt would still increase in future if necessary measures are not taken. Just for comparison purposes, the US public debt is about 100%, Italy, 160%, Germany 80% and Greece 180% (Whalen, 20-14, pp1). This means that Japan has unusual public debt. Reasons behind this state of the economy According to Bai (2001), there are several reasons put forward by economists explaining this phenomenon. One of the reasons is that the demographic structure of Japan is negative. Japan’s population is ageing; there are many old unproductive individuals than young productive individuals over the recent decades (Riley, 2014, pp181). This has led to the high labor costs due to scarcity of the skilled workers to work in the many industries; this has become a big challenge to this economy (Westra, 2012, pp702).  Japan’s population started falling in 2004 and ageing rate is faster. As per now, more that 22% of the Japanese population has already attained the age of 65 years (Whalen, 20-14, pp1). It is project ted that by 2060, the Japanese population would have fallen from 127 million people to about 87 million. Out of these 87 million, 40% would be above 65 years. The second and major reason that has shaken Japan’s economy is global financial crises that rocked this economy in 2008. This financial crisis ambushed Japan when it was unprepared. This left this economy in an ailing state.  As that is not enough, Japan has a weird history with natural disasters such as Earthquakes and floods (Riley, 2014, pp181). Japan has experienced earthquakes of heavy magnitude that have destroyed property worth billions and claimed thousands of lives within the last ten years.  Japan is a region of high seismicity since it is located adjacent to the the major tectonic plates boundaries (Westra, 2012, pp702).    Regular occurrences of earth quakes right from Chuetsu earthquake of 2004, the Fukuoka earthquake of 2005, Iwate- Miyagi earthquake in 2008 and the last one the Tohoku earthquake of 2011, which is termed to be the strongest earthquake in history that killed thousands of people, 100,000 buildings, destroyed. Moreover, there was a nuclear accident in Fukushima, which followed the Tsunami. All these disasters have had a great negative impact to the Japan’s economy. Effort to revive the economy through quantitative easing (QE) In recent years, the bank of Japan (BOJ) embarked on a number of economic reforms that were aimed at recollecting and reviving Japan’s economy (Westra, 2012, pp702).  The many occurrences of the natural disasters that hit Japan shook this economy to a desperate state.  Normally, many banks tend to employ some conventional monetary policies to normalize the ailing economy, but for Japan, this was too much. Convectional monetary policies could not yield a lot (Fawley & Neely, 2013, pp69).  ).   Therefore, the BOJ decided to employ unconventional monetary policy to try to stabilize the economy. One of these unconventional monetary policies is quantitative easing (QE) Quantitative easing (QE) is one of the unconventional monetary policies employed by central banks to stimulate the economy in a case where the conventional monetary policies have failed to stabilize the economy (Fawley & Neely, 2013, pp66).  The central bank use quantitative easing technique by purchasing specific amounts of financial assets to lower their yields and at the same time raising their prices (Parker, 2012, pp1). Under normal circumstances when the central banks use conventional or expansionary monetary policy to stimulate the economy, they purchase short-term government bonds for it to lower short-term interests. However, it reaches a time when these short-term interests touch its lowest point at zero, these expansionary monetary policies can now no longer work. (Westra, 2012, pp703) It is used to stimulate further the economy through buying the assets that have longer maturity. This results to lower long-term interests rates extending the yield curve (Bai, 2001). In most cases, quantitative easing is used to guard inflation not to fall below the targeted point. Sometimes the use of quantitative easing is regarded as a radical and aggressive way of stabilizing the economy. To an extent, this technique works but it has some demerits too, it cannot be depended on. The bank of Japan resorted to quantitative easing technique to salvage its Japan’s ailing economy. It did this because the conventional methods did not give the anticipated results. Therefore, the adoption of quantitative easing was a radical way of trying to stabilize it. The records from the past twenty years show that Japan’s consumer price index (CPI) has been roughly the same (Westra, 2012, pp702).   Despite of Japan’s economy experiencing difficulties for the last two decades, its inflation rate has been roughly zero (Fawley & Neely, 2013, pp66).  Some economists view this uncommon occurrence to where the inflation rate remains constant for such a considerable length of time to be harmful to the economy (Riley, 2014, pp181). Normally, quantitative easing techniques are applied in such situations to at least trigger the inflation rate to increase to a certain level. This means that constant inflation is not healthy to the economy; a good performing economy must show and experience an increasing inflationary rate (Westra, 2012, pp702).  In most cases, many countries struggles to cut the inflationary rate, however, Japan struggled to increase it in fact by adopting the quantitative easing technique. Since the time of global financial crisis in 2008, Japan was among the countries that engaged in the use of the quantitative easing technique to contain the situation. The bank of Japan pumped money into the economy with the main aim of lowering the long-term interests rates to curb the recession. This step was undertaken after realizing that other conventional monetary measures had failed to salvage the situation since the interests rates had gone to zero. Japan can be remembered to be the first nation to adopt this technique as early as 2001 (Parker, 2012, pp1). During the period of the global crisis of 2008, made many central banks of the developed countries to start employing quantitative easing to at least stimulate their economies through increasing bank lending, and encouraging expenditure. How Japan applied Quantitative-easing technique Japan’s tried quantitative easing monetary policy for the first time in 2001. This was after the big financial recession of 2008/2009. Japan’s economy was undergoing big hardships in its lifetime due to this crisis and the frequent natural disasters. The normal expansionary monetary policies alone could support the economy back to its normality. This prompted the bank of Japan to settle on quantitative easing as a last resort. Thus first attempt of 2001 was named as QE1; at this time, the bank of Japan increased its monetary base by about 60% and it came to a halt in 2006. The second phase, which was referred to as QE2, was launched in 2010 (Whalen, 20-14, pp1) The third implementation of the quantitative easing QE3 was in 2013 April. Analysts say that QE1 had little impact on the inflation. The reason given was that the technique was being tested and the stakeholders were not sure of what they were doing and what could be the results. In the QE2 and QE3, the results showed that the inflation rate increased to some extent. In addition, the outcomes showed that the price levels (CPI) could go up even in the absence of QE. During this period of applying QE monetary policy, Japanese government issued inflationary indexed bonds. These bonds pay interest rates that are calculated basing on the realized inflation (Antolfatto &Li, 2014, pp1). Normally, the measure of the bond markets’ at a predicted future inflation can be constructed through the comparison of the yield on the same inflation-indexed bonds. This can be measured against non-indexed bonds (Economist.com, 2012, pp1 One interesting thing about Japan after rigorous implementation of the QE after the 2008 crisis, there has been a significant decline and recovery of the in the inflation rate (Antolfatto, & Li, 2014, pp1).  This pattern was also noticed in nations such as the US and Europeans countries who employed QE. This implies that QE monetary policies can yield desired outcomes on inflationary rate if the central banks can commit and focus fully to the goals. The coining of the term quantitative easing has led to the emergence of other assets purchasing programs. One of the programs is credit easing. The initiative aims at supporting the economy through boosting liquidity and reducing interests’ rates in the event when the credit channels are clogged (Economist.com, 2012, pp1). QE proper is another type of assets purchasing program (Antolfatto, & Li, 2014, pp1).  The logic here is that lower bond yield tend to encourage borrowing, higher equity prices tend to boost the consumption rate. Thus, it both assists in investment and boosts the demand. When the investors increase foreign assets, portfolio rebalancing also weakens the domestic currency increasing the exports in turn. Effects of quantitative easing to Japan’s economy In reference to Kjell et al (2013), The outcome of this measure to the Japanese economy and other nations that used this unconventional way of monetary policy stabilized their prices.This proved that quantitative easing is one of the effective alternative policies that can be employed to support price stability In the event that Japan and other major economies did not apply this strategy, then the inflation of the major economies such as the US and Europe would have been lower as zero and even could go further to negative. Another noticeable outcome was that despite of not stimulating the economy fully, quantitative easing monetary policy had a positive influence on the industrial production in Japan Kjell, et al, 2013). The application of the quantitative easing monetary policy in Japan also contributed to the reduction of the unemployment. However, the outcome showed that quantitative easing has less effect on the economic growth of the economy; therefore, it cannot be a reliable option to boost the economy in case of low economic performance (Xin, 2014, pp163). To some extent, the effect of QE on some macro-elements such as stock prices, hose prices, exchange rates and consumer confidence is unclear .Economists suggest that for this technique to work well, some structural reforms and other policies should be blended. In Japan, QE has also supported the economy by cutting government-borrowing costs hence reducing the future burden of taxation. The adoption of the QE monetary policy in Japan had also a negative impact to the Japanese Yen. The Japanese Yen depreciated in its value and this affected the currencies of other neighboring nations in Asia such as China, Indonesia India (Antolfatto, & Li, 2014, pp1). These nations complained that Japan should use the usual convention monetary policies to control its economy because it is affecting them too. The Japanese on the other hand argued that they adopted this measure to support the growth of their economy and contain inflation. However, the Japanese yen weakened and there were trade imbalances between Japanese and its neighbors (Xin, 2014, pp162) Conclusion Japan is one of the modern economies that have had trouble in the recent decades that pushed it to the brim of collapse. However, through tactics and the manipulation of the macroeconomics elements, it has managed to survive narrowly. There are a times when the popular or conventional monetary policies fail to work because of the enormous magnitude of the disasters such as those that faced Japan in the last few decades. The only last resort if such a situation prevails is to act radically by introducing non-conventional monetary policies targeting certain areas of the economy. Quantitative easing is among the non-conventional monetary techniques that have been employed by Japan. To an extent, this technique has assisted this nation to start recollecting itself after the global financial crisis and other recurrent natural disasters that brought the economy to its knees. References  Antolfatto, D & Li, L. (2014). Quantitative Easing in Japan: Past and Present. Accessed 23 October 2014. Retrieved from http://research.stlouisfed.org/publications/es/article/10024 Bai G (2001) Japan’s Economic Dilemma: The Institutional Origins of Prosperity and Stagnation: Cambridge University Press: United Kingdom. Fawley, B & Neely, C. (2013). “Four stories of quantitative easing,’ Review (00149187), 95, 1, pp. 51-88. Accessed 23 October 2014. Michael, J., David M., Andrew, S &Dimitri V. (2012). Quantitative easing and unconventional Monetary policy – an introduction. The economic journal. Accessed 23 October 2014. Retrieved from http://qed.econ.queensu.ca/faculty/milne/870/QE%20and%20unconventional%20m onetary%20policy.pdf Parker, J. (2012). Bank of Japan. Feeling the squeeze o quantitative easing. Accessed 23 October 2014. Retrieved from http://thediplomat.com/2012/09/bank-of-japan-feeling-the-squeeze- of-quantitative-easing/ Riley, J. (2014). “ The legality of Japan’s current monetary policy under international law, Journal of east Asia & international law , 7,1 pp 181-182. Accessed October 2014. Westra, R. (2012). The Japanese economy in the crossfire,’ Journal of contemporary Asia, 42, 4, pp 697-706. Accessed October 2014. Whalen, C. (2014). Is Japan’s economy headed for collapse?. Accessed 23 October 2014. Retrieved from http://nationalinterest.org/feature/japans-economy-headed-collapse-11217 Xin, C. (2014). “Japan’s unspoken currency manipulation by monetary policies: A Chinese Lawyer’s perspectives. Journal of East Asia & international law, 7, 1, pp161-162. Accessed 23 October 2014. Kjell Hausken, Mthuli Ncube (2013) Quantitative Easing and Its Impact in the US, Japan, the UK and Europe; Springer New York Heidelberg Dordrech London Read More