Differences between Japanese and the US Economy - Research Paper Example

There exist a huge similarity between United States and Japan economy. Both of the economy enjoys a high rate of industrialization and a higher standard of living. However, they are very different in some critical ways. The United States economy is twice large as compared to Japan in terms of nominal and purchasing power parity basis (Cooper 4). Moreover, the Japanese standard of living is slightly lower that of United States in terms of GDP basis and purchasing power parity (Cooper 4). Japan has enjoyed a low economic growth and recession in for a long time while that of United States remains stronger (Cooper 4). For example, in the last one decade, the United States annual GDP growth rate has been more than two times that of Japan (Cooper 4). This is because Japan economy has been more vulnerable due to the global economic downturn. In 2009, the GDP of Japan declined by 6.3%, while the united states declined by 2.5% (Cooper 4). This paper seeks to delve on the differences between Japanese and United States economy. In the last two decades, economists have drawn comparisons between Japan and the United States economy. Both countries demonstrate a huge difference in macroeconomic and microeconomic aspects (Katzner 17-23). There exist many important differences between United States and Japan. Firstly, there exist differences in both countries debt to GDP. For example, the Japanese debt to GDP ratio is over 100 percent (Harvard Magazine 2). In fact, normalcy has been maintained by having a zero interest rate, and hence the budget pressure is concealed. This means as the interest rate accumulate, payment of national debt will be a challenge. Moreover, the current rate of deflation continues to rise. On the other hand, the ratio of debt to GDP is lower in United States, and there exist a reasonable annual inflation rate of 2.3 percents (Harvard Magazine 2). However, the debt is rising at a higher rate as compared to GDP. Secondly, Japan is major creditor in the world, and this has made it maintain a trade surplus with the rest of the world (Harvard Magazine 2). This has made it possible for the country to accumulate many foreign assets. This has also made the country vulnerable to a currency crisis despite its debt load. The other important difference exists on the Japanese workforce. The aging of Japanese workforce is the major contributor to the stagnation of the economy that has been a problem for a long time. In fact, the ratio between workforce and retires is at 4 to 1, and is expected to change in the next twenty years (Harvard Magazine 2). This is a challenge to the economic growth, and getting enough talented people for various field of expertise, to social security and pensions. The issue of demographic is also a challenge to Japanese saving rate (Harvard Magazine 2). The retirees have been using their saving to be able to maintain their standards of living (Harvard Magazine 2). This is one of the challenges posed to the economy by an aging society. In fact, most of the country source of wealth is through domestic government debt (Harvard Magazine 3). This means taxpayers of the next generation will be used to cash these bonds, and they will have to be taxed. The reliance on internal debt to fund retirees is a significant fiscal challenge (Harvard Magazine 3). In the end, the debt crisis of Japan will be increased to a steep rate. Japan has been struggling to get out of this economic challenge. However, Japan export continues to rise, as compared to the size of its economy (Harvard Magazine 3). This is a challenge, as Japan seems to be doing little in enhancing an increase in domestic consumption. Furthermore, an aging population is another drawback to increase domestic consumption. This has contributed to an increase in deflation. Consequently, there is an overshoot of real value money, and thus debt becomes more difficult to pay leading to retarded economic growth (Katzner 20). On the other hand, the United States export has been on the rise, due to increase on the strength of demand from growing economies (Harvard Magazine 3). This has also been possible due to a weaker dollar. Consequently, whereas Japan has been experiencing contracting work force that reinforces the country burden of debt, the United States has potential to grow. This is probably due to increasing number of immigrants in the United States. This means the country can tighten it muscles, whenever there is a challenge to the economy. Moreover, the United States enjoys a reasonable fertility. This is because the population keeps on growing. This means there will be a larger workforce in the future, and this will make it possible to pay retiree benefits (Harvard Magazine 4). Moreover, the American workforce is ever increasing. This makes it possible for the status of the economy to adjust upward, and thus deflation is less likely to occur (Harvard Magazine 4). If this trend is maintained, the overall debt will gradually become a smaller percentage of GDP. Another significant difference exists on living standards. Japanese overall enjoy a higher living standard as compared to the United States (Shilling 1). The economy recovery approach has benefited both high and moderate-income earners cautioning them from high unemployment and collapsing home prices (Shilling 1). However, increase export and weak imports has led to low domestic spending and hence has led to current account surpluses (Shilling 1). This leads to immense deficit. Consequently, the government’s bonds earnings are reduced. United States is a whopping importer with a chronic current account deficit (Shilling 1). Therefore, foreigners spend heavily on bought treasury with the resulting dollars they earn (Shilling 1). This means Treasury bill and bond yields are higher as compared to Japan. In addition, the United States economy is usually an open economy while Japan is largely closed apart for its export sector. Additionally, there has been a variation on the currency of two countries. For example, the yen has remained strong while the dollar has remained weak for a longtime (Shilling 1). This has led to Japan’s chronic current account surplus, and America’s chronic deficit (Shilling 1). The strength of the yen has necessitated the Japanese manufacturers to move their production to low cost areas. Moreover, in United States there is no cohesion as the case in Japan (Schuman 1). This means there is no society safety nets that are beneficial in time of slow growth rate. Secondly, America has no net creditor status of Japan. Moreover, in America there lack capability of generating surpluses on its balance of payments as compared to Japan (Schuman 1). This means there are fewer cushions, and hence increases and this makes it possible to have foreign infiltration (Schuman 1). Japan on the other hand has exceeded the United States in terms of savings. Its gross national saving rate is 23.8% compared to United States with 9.6% (Cooper 5). This has been used to explain why the United States has incurred current account deficit with Japan. This also explains why Japan continues to be a crucial net creditor while the United States remains a net debtor (Cooper 5). Moreover, Japan has built a vast volume of public debt. In fact, its debt burden as a ratio of GDP is more than twice that of the United States (Cooper 5). The problem of the public debt has been of concern one decade the country makes an effort to accelerate success with increased government spending (Cooper 5). The comparison of the two economies is essential to understanding the development of global economics. This is because both countries have a massive stake in the world economic powers. Both of them account for over 30% of world domestic product (Cooper 2). They also occupy a significant portion of international trade and international investments. This position makes the two countries a powerful determinant in the world’s economy. Therefore, economic situations in the two countries significantly influence the rest of the world. Additionally, the mutual interaction between the two countries in terms of trade can affect economic conditions in other countries (Cooper 2). There also exist a difference in the accrual of debts between Japan and the United States. In United States, the debt measured on an accrual rather than cash basis was $15.7 trillion in 2012 (Pethokoukis 1). This is the largest in the world for a single country. However, America debt accrual is measured on cash basis, but the government releases an estimate of the United States accrual basis on individual programs. The United States as a major importer is allowed to have a high rate of debt by major exporter’s so that it will keep buying exports. The bailout program, military spending and economic stimulus package instituted by the Obama administration led to an increase in national debt (Pethokoukis 1). The national debt is predicted to move to unmanageable level if proper policies are not instituted. The national debt is expected to increase in future due to social security, Medicare, drugs, and liabilities from government funded programs. After Obama took power, the national debt has grown at a rate of 15% (Pethokoukis 1). Despite these challenges, America continues to have a stable economy on top of huge debt. However, in United States there has been a substantial cut to the government workforces. On the other hand, Japan is amongst the top ten countries deepest in debt. Japan debt as a percentage of GDP is over 200%. This is the highest among the world-developed nations. At the same time, the general government debt is $13.7 trillion (Nbcnews 1). Even after the country accumulation of huge national debt, it has been able to overcome economic distress experienced in countries such as Greek. This is because Japan enjoys a healthy unemployment rate. In addition, there is a population of domestic bondholders (Nbcnews 1). These ensure that they consistently fund Japanese government borrowing. The accumulation of debt to a particular country is a negative factor. In the short run, it benefits the economy. However, in the end, it is harmful as debt holders want larger interest payments to cater for increased risk involved. In addition, a higher debt means that there will be increased tax rate to repay the debt in future. This means the situation of the economy will affect the future generation by taking high tax. Moreover, some of the benefits provided by the government are likely to be curtailed in future. Debt leveraging can benefit the economy or become fatal to the economy. It is disastrous to the economy when a country owes more than it is worth. This means the country is unable to pay its debts and affects the country credit rating. This has led to economic crisis like experienced in Greece. Most of the countries in the world adopt economic policies that would stir economic growth. This has been a route taken by Japan and United States. Firstly, in United States the federal government venture in policies that would ensure there is a healthy economic growth and benefits all American citizens. This is because an economic policy that benefits one section of the society would be a threat to growth of the economy. For example, maintaining the country inflation may make it difficult for the economy to grow and create employment opportunities ("American Government: The Goals of Economic Policy" 1). This means the unemployment rate would go up. On the other hand, low interest rates would mean inflation goes up, and hence most of the workers income would become meaningless. For this reason, the economic policies adopted in United States are because of compromise by members of different political parties. There are various policy adopted by the federal government to maintain a strong economy. The three most important policy goals include stable prices, full employment, and economic growth. The federal government has other objectives to maintain good economic policy. They include low or stable interest rates, balanced budget, and trade negotiations with other countries (Federal Reserve 1). For the United States to achieve a high economic growth, it has adopted a policy that would bring good infrastructure. United States has been increasing investment in the transportation infrastructure. This is meant to generate jobs to employ workers. The additional infrastructure is believed to be able to create additional employment through the jobs created by additional infrastructure investment (Federal Reserve 1). Moreover, there is a goal of selecting projects with a high payoff. This is essential as it provides opportunities for the private sector to invest in public infrastructure. This is easily achieved through pairing federal investment with state, local, and private investment (Federal Reserve 1). Additionally, a well functioning infrastructure brings large returns not only to those people who use the transport sector, but also surrounding region and nation. The investment in the infrastructure also employs underutilized resources, and raises the nation productivity sector, and economic potential. Therefore, the proposal by the president to increase the nation’s investment in transportation infrastructure is well advised. This is because it would have a profound economic impact by raising the nation economic output. Moreover, there will be creation of quality middle class jobs, and hence enhance America global economic competitiveness. Secondly, the united states have revived its intervention on interest rate especially after the financial crisis of 2007. This is because the crisis led to prolonged global economic downturn. Therefore, extraordinary measures were taken by the government to counter the crisis and help in stabilizing America economy and the financial sector (Federal Reserve 1). The interventions involved reducing the interest rate to zero (Federal Reserve 1). Additionally, there was a reduction of long-term interest rates, and this provided further support to the United States economy. This was through purchasing of long-term treasury securities and long-term securities issued by government-sponsored agencies (Federal Reserve 1). The low interest rate was important as it helped households and business finance engages in new spending. The other policy adopted by the United States is on market. In the recent years, there has been payroll employment growth, and a growing share of people with jobs. However, the number of those people with good jobs has been declining in last one decade. However, the government through policy implementation has engaged in countering this problem. This was through various attempts to raise the minimum wage. There has also been attempt not to exclude the immigrants from the labor market. The social safety net in America has also improved significantly. This is best seen in the provision of Medicare program. On the other hand, Japan has maintained economic policy that encourages minimal on social welfare, and national defense programs (Sakoh 2). This means that it has been able to reduce the rate of spending while at the same time encouraging economic growth. This was meant to control an increase in expenditure and maintaining small deficits. This has helped the government to maintain balanced budget, and at the same time keeping tax rate low (Sakoh 3). This has helped Japan to maintain a low tax rate among the developed nations. Secondly, the Japanese government has encouraged private owned entities to compete with its own enterprises. For example, in the transport sector, privately owned railway companies compete with the national transportation services such as Japanese National railways (Sakoh 3). There have been changes as the policies have encouraged private investment and ownership of goods, and hence spur economic growth. In addition, Japan interest rate is zero to 0.1 percent (Trading Economics 1). This is meant to control money market operations. This has helped the economy to stop further weakening, and hence the mode of decrease has been moderating. In addition, the non-manufacturing sector has also been able to show some resilience of the economic downturn. These monetary policies were aimed at achieving price stability, and hence lead to economic growth for future prosperity (Trading Economics 1). Lastly, in Japan there has been adjustment in structural programs. This was meant to enhance the country investment on various sectors of the economy. In the United States, there is a tremendous export potential in various economic sectors. Exports are essential to the United States economy and acts as a driver of economic growth. The united states export account for 13.8 percent of united states GDP (Department of Commerce 4). The president initiative is to have the United States export double by the end of 2014 and hence support millions of jobs (Department of Commerce 4). In fact, United States has huge untapped potential to increase U.S exports. The tremendous potential of United States lies in the energy and agricultural sector. In the energy sector, gas is proving to be a major potential for export. This is because there is a glut of natural gas and low gas prices. The issue has been on the energy by different players in that sector. This means by exporting natural gas, the United States economy will experience a tremendous boon. On the other hand, there exist vast coal deposits in United States. In fact, United States has been enjoying an increased export of coal in the last two years. This has occurred with an increasing global demand of coal. If exploited fully, the United States could overcome the world major producer of coal such as Indonesia and Russia. The other export potential on United States is on agriculture. America is the major producer of corn. Most of the time, this is produced in excess. This means those country that depend on the daily production would export feeds for manufacture of feeds and other daily products. On the other hand, Japan appears as a major destiny of American exported goods. In fact, Japan is one of the best opportunities in the world for exported products form United States such as food products (Maday 1). In 2011, over $14 billion worth of agricultural products were exported to Japan from the United States (Maday 1). However, Japan export potential lies on manufactured goods. Most of these are technological equipments such as computers and software’s. There also exists a considerable difference in the manufacturing sector. Recently, America manufacturing has been experiencing a form of resurgence. This has been coupled with jobs increases. In fact, 2012 indicators showed jobs growth with more than twelve percents of new domestic jobs surpassing the normal average of 9% (Galloway 1). However, due to economic downturns the growth leveled at the end of 2012. Apart from this negative, the automotive manufacturing performed well adding over 100,000 jobs, and this is expected to improve by 2016 (Galloway 1). For America manufacturing sector to improve, there has to be skill developed and technological innovations. This means the manufacturing jobs that lack skills will be occupied in the near future. Manufacturing has a major impact on the nation employment and prosperity. In fact, they pay higher than average wages (McConaghy and Swezey 4). They also produce a high level of output. On the other hand, Japan has been leading in manufacturing of products such as technological equipments. This has ensured that Japan become a critical importer to some countries such as the United States. This has been possible through a well-funded education especially in science and technology. This makes Japan a major exporter of computer accessories and automobiles. Most of manufacturing industries in Japan depend on raw materials for other countries. The manufacturing sector in Japan contributes significantly to the growth of real GDP. In Japan, there is more technological input to the manufacturing sector as compared to the united states (McConaghy and Swezey 8). This has enabled Japan to produce massive goods and services for export. There also exist a difference in growth rate between Japan and United States. The United States growth rate was reported to have gone down in last year. This was due to unfavorable fiscal policy adopted by the government. This was also complicated by increase government spending. This has dealt a big blow to the progress of the United States economy. This has necessitated the focus on policies that will lead to a significant decrease in the federal spending. This is expected to take place in March. In fact, Americans have a higher payroll taxes after the expiration of temporary tax cuts in January (The New York Times 1). Furthermore, the economy contracted at an annual rate of 0.1Percent in the last three quarters of 2012 (The New York Times 1). This happened even after having a lower military spending, fewer export, and smaller business stockpiles. However, the economy still showed some resilience with a relatively strong spending by the consumers and businesses (The New York Times 1). This year projection is that the economy will maintain at 1.5%. Although there is cut in defense spending, economy is also expected to be hurt by higher taxes. The low rate of GDP growth means that the government has no clear policies for creating new jobs and stimulating the economy. However, there are some effort by the federal government revive economic growth. This is being done through holding of common interest and growing its value on treasury securities and mortgage backed securities (The New York Times 1). For this reason, it is expected that with proper policy accommodations, the economic growth will proceed at a moderate pace. This means in the end, the unemployment rate will eventually decline. The unemployment rate in United States remains at 7.8 percent (The New York Times 1). On the other hand, Japan growth rate has faced numerous challenges. In fact, Japan has struggled in the last two decades to revive economic activities. For years, Japan growth rate has never surpassed 4 percent (Lipton 1). After a recovery from the earthquake, Japan growth rate is expected to exceed 2 percent. However, it is expected to face challenges due to global slowdown. However, Japan fiscal reforms aims at having a higher economic growth by 2015 (Lipton 1). This is hoped that it will be able to bring down Japans high public debt ratio. In the last quarter of 2012, Japan growth rate was at 3.5% (Riley 1). There are fears that the economy may go back to recession if the economy remain at that rate. The economy has also been experiencing a decline in export especially after a recent spat with china (Riley 1). Japan interest rate also remains the lowest in the world at one percent (Feldstein 1). This has been possible to maintain due to the strengthening of the yen against other major currencies. This raises the Japanese bonds as compared to the bonds dominated by other major currencies (Feldstein 1). Additionally, there has been a decline in household saving. This was due to high corporate saving and small business investment leading to the current account surplus (Feldstein 1). In conclusion, it is true that there is a vast difference in United States and Japan economy. This difference is best explained using both microeconomic and macroeconomic policies. However, there are notable differences in the two economies. The first is on the size of aging population and retires. Secondly, there exist a difference in the growth of GDP and amount of interest rates. Thirdly, there is also a difference in export potential. In this paper, it is clear that Japan export potential lies on the technological equipments while the United States export potential lies on the energy and agriculture. It is also clear that Japan in terms of manufacture is highest as compared to the United States. Lastly, it is clear that Japan economy is mostly faced by challenges that cannot be controlled such as earthquakes. The two economies will continue to compete in the world arena. This is because each country will struggle to maintain the world economic status. For this reason, each country will have to implement sound economic policies that would spur economic growth. However, it is also important for these two countries that there are other economic giants emerging in the world, this is most evident from the Asian countries and the southern part of America in countries such as Brazil. Works Cited "American Government: The Goals of Economic Policy." Cliffsnotes.com. Web. 25 Feb. 2013 . Cooper, William. “Specialist in International Trade and Finance.” U.S.-Japan Economic Relations: Significance, Prospects, and Policy Options (2012): 1-22. Print. Department of Commerce. “Powering Export Growth.” Annual Report (2011): 1-24. Print Federal Reserve. “Why Are Interest Rates Being Kept At A Low Level?” Federalreserve.gov. Web 23 February 2013. . Feldstein, Martin. “Japan's growth strategy is all wrong.” Guardian.co.uk. Web 25 February 2013. . Galloway, Ryan. “What Will Drive Long-Term Manufacturing Growth?” Forbes.com. Web 24 February 2013. < http://www.forbes.com/sites/bmoharrisbank/2013/02/14/what-will-drive-long-term-manufacturing-growth/>. Harvard Magazine. “An Aftermath to Avoid.” Harvardmagazine.com. Web 23 February 2013. . Katzner, Donald. “Economics in the US and Japan.” London: Routledge, 2008. Print Lipton, David. “Japan’s Growth Challenge.” Imf.org. Web 25 February 2013. . Maday, John. “Potential for growth in exports to Japan.” Cattlenetwork.com. Web 24 February 2013. < http://www.cattlenetwork.com/cattle-news/Potential-for-growth-in-exports-to-Japan-185475532.html>. McConaghy, Ryan and Swezey, Devon. “Manufacturing Growth.” Thebreakthrough.org. Web 24 February 2013. < http://thebreakthrough.org/blog/BTI_Third_Way_Idea_Brief_-_Manufacturing_Growth_.pdf> Nbcnews. “Japan Tops List of Countries Deepest in Debt.” Nbcnews.com. Web 23 February 2013. < http://www.nbcnews.com/business/japan-tops-list-countries-deepest-debt-1C7100630>. Pethokoukis, James. “The national debt.” Aei-ideas.org. Web 23 February 2013. < http://www.aei-ideas.org/2012/06/the-national-debt-isnt-15-trillion-its-50-tillion/>. Riley, Charles. “Japan's Economy Contracts at Swift Pace.” Cnn.com. Web 25 February 2013. . Sakoh, Katsuro. “Japan Economic Success.” Cato Journal 4.2 (1984): 1-27. Print Schuman, Michael. “Economy and Policy.” Time.com. Web 23 February 2013. < http://business.time.com/2011/07/08/is-america-facing-a-japanese-future/> Shilling, Gary. “The New Economy.” Csmonitor.com. Web 23 February 2013. . The New York Times. “Economy.” Nytimes.com. Web 25 February 2013. . Trading Economics. “Japan Interest Rates.” Tradingeconomics.com. Web 24 February 2013. < http://www.tradingeconomics.com/japan/interest-rate>. Read More