Future of Japanese Economy - Essay Example

--------------------- --------------------- --------------------- --------------------- Future of Japanese Economy Introduction Japan, aftermath thewar experienced a troublesome situation in economic development. Many of the industries were destroyed by World War II and as a result GDP fell down1. But, on the basis of production oriented mobilization system in the private sector, Japan has developed its political and administrative system into the direction of country's economy. Along with the introduction of new technologies and formatting industrial structure, government rules and regulations also helped to bring back its economic condition as it was before the war. A chain of economic crisis like financial panic of 1927 and the oil shock, include the invasion of Manchuria in 1931, the attack on Capitalism during 1930s, war with China from 1937 to 1941, Pacific war in 1946, the Dodge line of 1949, recession of 1965 are the common examples of depression that Japan encountered other than World War II2. Though, very soon they recovered it with 10% average of economic growth in 1960s, 5% during 1970s and closer to 4% in 1980s, but after that, growth slowed down remarkably3. Strong working mentality, good government-industry relationship and implementation of advanced technology were the most favorable reasons responsible for making Japan stand on to the platform of one of the largest economy in the world from post WWII till 80s. Resultant of overinvestment in late 80s and crisis in world oil supply brought another challenge to their economy4. It became necessary for Japan to switch from mobilized productionism to more substantial welfare economy. However, the oscillation between successful drive of the export in late 80s and bang in economy after 80s hazed that requirement and mobilized economic system disappeared very soon5. After the fading away of stock inflation and land prices, an excess of production capacity remained. This factor lowered the profitability of the production and on the other hand, bad loan weakened the financial activity. Government's effort in recovering that downfall was not up to that level and it's clear from the statistics of economy for the duration of 2000-20016. Hence, it is inferred that Japan is in a state of distorted industrial policy and in urgent need of a revolution. The main aim of this paper is to address the main obstacles that Japan is facing and then to state the possible solutions to overcome them. Obstacles in Japanese Economy Japan is facing resistances now-a-days that it had never encountered before. Growth rate which used to be in two digit figure just after war, now expectation growth is below 1% which is too unsure. Country that had incredible unemployment rate till 1980s has now rose to 4.8%. Present crisis of its economy consists of short or middle-term problems like; financial difficulty, trade cycle and public finance. Other than that long term problems are there which are related to going into matured stage of progress. One of the important aspects of Japanese economy is its iron triangle which dominated the people by managing their particular interests. However, due to the changing of technologies and human preferences that system is losing its supremacy. After 1990s when the economy condition is at matured stage, safety and stability becomes the main points of concern; but 'iron triangle'7 sometimes might block the transformation in the required direction. The creation of societal life is supposed to be the center of long term task of Japanese economic society. The population of Japan is expected to reach its peak in 2007 and then turn to decrease which may lead to the composition of population over sixty-five to surpass 20% in the target year of the total population and after that reach the high plateau over 27%-30% after 20 years. This effects the shifting in arrangement of consumption in industries. But, the question here comes whether pure market economy will be able to adapt this shift in consumption as market is driven by profit seeking impulse or not In the past, Japanese had the tendency to use to the natural resources most cheaply for development and growth purpose but, recently the resource problem is being handled after considering the harmony between man and nature. It has two valuable aspects as man acting on nature and nature reacting to human approaches. Previously they never thought of the balance and ignoring it randomly went for resource utilization. But, this sort of tendency created problem now where, global warming and decrease in rainfall etc are coming as major issues. Due to radical increase in utilization of natural resources, waste and pollution have increased to a great extend that almost exceeded nature's assimilative capacities. It in a result is causing disorder in the system and producing environmental issues. As per the report submitted by Resources Research Committee of the Japanese Science and Technology Agency, few proposals were made regarding the ways that Japanese should follow in order to utilize resources adequately8. It consists of preserving environment by endorsing proper utilization of resources in harmony with nature; developing Japanese islands in a controlled manner and promoting land utilization plan which will be aimed at maintaining the reproductive powers of nature; upgrading industrial structure which will meet the future changes regarding resource supplies; and, encouraging the development original scientific technology for environmental preservation etc. The above mean that those strategies are not only restricted to Japanese economy revitalization but also world wide. Natural resource problem is the dominating factor in country's economy. Oil crisis that has been running since 70s still is a major issue for the engineers to think. From the researchers' point of view, oil problem is only due to the result of mismanagement of international political and economic relations. Though crisis is based on men's inability in controlling and managing the things but, it is affecting most to the development and profit of an industry. Developing countries are demanding for a more equal distribution of world resources and equity. Inequalities like difference in income and consumption of resources are being tried to equalize by them. As oil problem and current growth issue are interrelated, hence steps to solve them in a distributed manner must be avoided9. Population of Japan is increasing in a drastic manner, in turn scarcity issue becoming prominent more. Hence, this obstacle must be tacked carefully to alleviate the current slowed down of growth. The monetary policy of Japan is getting limited due to deflation; the nominal interest rate goes down to zero and resulting monetary policy can not be taken through interest rate management. Another problem with deflation is that the amount that debtors need to repay continues to increase. Another issue is with population projections which are used at the time of forecasting social security payments. In Japan the basic principle works behind the pension system is that the younger generation pays for the older one. As per the standard forecast, with the same fertility rate of 1.3 the last Japanese will likely be born in 2800! It means for the last Japanese born in 2800 the pension system will not be sustainable10. Thinking that Japan's financial problems will go away very soon is somewhat unlikely as it will be revealed from the calculation stated below. As per the record of March 2003, the banking system was harshly undercapitalized. One rough estimate was performed and based on that it is concluded that, banking system needs 35 trillion more capital if all the corrections needed to incorporate hidden loses, underutilized capital and deferred tax assets are done. The recovery which has been started in Japan will be able to compensate this huge amount is a matter of question. East Asia shows a government-business relationship also known as 'governed interdependence'. But the existing accounts are unable to integrate the reality and concept of public-private cooperation11. Examples of Government Financial Institution (GFI) are Government Housing Loan Corporation, Development Bank of Japan, Japan Bank for International Corporations etc. which are a part of FILP, a program through which Japanese government allocate loans, funds and investments. As economy matured, government financial institutions like GFI and FILP started to disappear. Problems of GFIs include; government financial institutions may distort the competition by competing with other private institutions by unfair means, even if they don't compete but, they may keep losing money costing to the taxpayers etc12. Long term employment system that helped Japan to attain the summit of growth still, it possesses some drawbacks from workers' point of view13. Workers did not use to get full annual leave due to high incentives for long term competition and uncertain allocation of job. Also, they need to work more than their normal working duration. Promotion was based on the age and for this reason, young workers don't get chance to get promoted even if they have talent and work hard. Same work over a longer period changes the tastes of workers and relocation was not as easy as it incorporates high cost14. Overcoming the Obstacles Main obstacles of current Japanese economy have been already discussed. Solutions to the problems that Japan is facing have different directions. As a most important task, Japan should not shift the recession effect of this crisis on other countries. Building good relationship with other countries may help them to alleviate their drawbacks. It needs raw materials and energy from other nations and also exporting the products. With a good foreign relationship approach, production cost can be lowered as well as exporting function can be enhanced. To develop their self sustaining national economies country should aim at positively behaving with resource exporting countries forgetting narrow minded searching for one sided profit. This can be built up by technology transferring, transplanting of industry, giving hand for processing of resources at producing countries etc. It is immaterial to think that by next few years it will be able to provide all the resources by itself where right now the country is dependent on other nations for more than 90% of materials. Economists think that the high reliance upon foreign energy would simply lead to susceptibility of Japanese economy. This demand can be fulfilled by making the system stable with a relation of true interdependence. One example can be put relating that. Japan has been undergoing with oil crisis for past few decades. But, a true relation can be set up with the Middle East countries as they are also in need of capital goods, machineries and industrial materials in return of oil supply15. Again, if it comes properly with the industrial developments of Middle East nations then Japan's export part will be strengthened. Further opening the stock market and liberalizing to accept 'oil money' in the true sense another stone towards building relationship can be assumed. Other than this, engineers must go for other energy sources like non-conventional energy sources seriously to meet the energy requirement within the industries. Along with the long term policies, short term ones are also necessary to maintain in order to prevent drastic changes in price and imbalances in supple and demand. Japan should purchase as much materials from foreign countries as it is getting from them and must not reject their proposal of sharing resources and information. In 1999, 'zero interest rate16' policy was introduced whose policy was such that until the deflationary expectation was dispelled, policy would be in place. Due to the elimination of deflationary pressure the zero interest rate was removed in 2000. Government should give a thought regarding this. The population problem as discussed, the last Japanese person is suppose to be born in 2800 but, if we explain the fact in other way then, we will find that Japanese are not going to disappear and the decline of fertility is a temporary aspect. There are mainly two effects on fertility. First one, if women's wage rises they tend to have fewer children. Its so, because they prefer to work more and earn money instead of wasting their time with their children. Second effect is related to high fertility rate commonly known as income effect. When women's wages raise enough, fertility increases. According to a report there are some women who don't have fixed job called 'freeters' who don't have long range plans17. Though they don't prefer children but, incorporating tax incentive, subsidy the fertility rate may be regained. Professor Weinstein has already mentioned GDP ratio and net debt today as well as likely rate in 100 years. Nominal GDP and net debt need to be stabilized and the deficit should reduce to zero. There is a primary deficit in budget relative to GDP of about 5% which may raise the government debt and also there is deficit coming from interest payment. With these two effects acting together, the deficit will rise by 2013. In Japan problem on pension system exist which became prominent because he younger generations are not willing to pay for pension premium. Even government is also not taking interest to resolve this issue. As pension premium is not being done properly hence, it has to be replaced by tax resulting heavier tax burden. By privatizing the system this problem can be avoided. If government expenditure is needed to keep constant then much needs to be done. If we observe the social security contributions, medical care system or pension system then, it is agreed that those are the vital points need to be considered directly related to Japanese public finance. Issues concerning price level targets are temporary but they may cause danger by making diverged from final goal meaning that trustworthiness could be damaged by managing the policy. Solution can be obtained in about ten years by keeping target of the fiscal target policy for zero primary deficits or introducing Numerical expression which is a reference level in association with CPI. Regarding the dissatisfaction related to long term employment, workers should be paid high as over work charge as money is the great motivator. There must be some flexibility in the annual leave like if one worker is seeking leave then the amount of hour he is not doing job must be compensated during his working hours. A revised policy is must for promotion. It should be based on working experience and not only age. Internal relocation within the company can be introduced to keep the workers fleshly and lively. The banking problem in Japan can be overcome by after moving away from the failed policies and towards an environment which has a chance of working. The FSA special inspections should be prolonged and toughened up and making available to all types of borrowers. Banks which are in need of recapitalization must be sufficiently done so once but for whole, rather than in a peaceful fashion. But it has some approximation. The above said recommendations make no sense without a coordinated macro policy. We do assume that macro economy has appropriate policies18. Conclusion The main aim of this research is to address the obstacles that now-a-days Japanese economy is facing and the type of future economy it may encounter without any such reformation. It has been found that country has some serious resistances that are slowing down the growth adequately. As a revitalization strategy, solutions for few of the problems have been outlined. It is believed that none of the nations are perfect but, it's the people who can make a change of the existing structured problems and bring revolution into the direction of development. References Japan Immigration Work Permits and Visas. http://www.skillclear.co.uk/japan/default.asp Japan: Patterns of Development. http://www.country-data.com/cgi-bin/query/r-7176.html Klein, D. (1980). Japan 1979: The Second Oil Crisis. Asian Survey. Vol. 20. No 1. pp. 42-52. Yagi, K. Problems of Japanese Economy and Public Space: Embedding Japanese Economy in the Civil Society. Japan Economy (2002). CIA World Fact Book. 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