Japan: Overview of Economics | Angie Kovachik | BU-501 Economics | |

Introduction Japan has had its struggles in the past and even more recent years with economics. Many factors and issues that Japan faces have come into play, therefore affecting their economy. Over the past 70 some years, Japan has however developed into an advanced and rich economy. Japan has a mixed economy that is made up of both private ownership and governmental intervention, including the MITI’s guide of national resources to meet commercial pursuits and the use of keiretsus provide goods and services to end users (Luthans & Doh, 2015). The keiretsu uses a close interlocking structure between manufacturers, suppliers, and distributors. Another characteristic that has helped Japan since the post-World War II era is the guarantee of lifetime employment for a large part of the urban labor force. However, more recently we have seen Japan’s economy slow in growth and corrode because of global factors and the demographic crisis they are experiencing (CIA, 2016).
The economy has tumbled into a recession four times since 2008, but did rebound because of government stimulus. The massive earthquake and tsunami that devastated the country in 2011 was hard hitting to Japan in many ways and rippled through the economy that year and the following year. The country saw an upward growth in 2013 due to the Prime Minister, Shinzo Abe’s, “Three Arrows” economic reform. The Three Arrows included monetary easing, flexible fiscal policy, and a structural reform. In 2015, Abe revised his Three Arrows to set a goal of raising GDP by 20% by 2020 and reverse the major demographic issue that Japan has faced (CIA, 2016). He also has revised his plan to restart nuclear power plants with stricter safety standards in an effort to show the importance of nuclear energy in Japan. Japan reached an agreement on the Trans-Pacific Partnership (TPP) negotiations in 2015, a pact that opened Japan's economy to increased foreign competition and created new export opportunities for Japanese businesses (CIA, 2016). Shinzo Abe’s administration has had a difficult time so far in 2016 with tackling the sluggish economy in Japan and trying to revise policies and reforms for the future. Currently, Japan’s economic forces have not been favorable and will require an overhaul in order to get regain the country’s stability.
Taking a look at economic data of Japan over the last 10 years really gives an understanding of where the economy was, the ups and downs it faced, and where Japan is heading. As with any economy, the ebbs and flows are a given within a country. It is dependent on how the government acts upon picking its country up and getting back on track to be successful in the global economic “race.”
Data Analysis
The economy of Japan is slow-growing, but as discussed the government has taken steps to reform and boost the economy to turn around the recessions it has been experiencing. Over the last five years, Japan’s economy has experienced a turnaround, with losses being replaced with gains. Improvements in labor and trade have pushed Japan forward, but government spending has been significant and recently was funded by a multi-year increase in sales taxes. Measured on a purchasing power parity (PPP) basis that adjusts for price differences, Japan in 2015 stood as the fourth-largest economy in the world (CIA, 2016).
Shinzo Abe has taken preliminary steps toward structural economic reform as part of his “Abenomics” plan to pull Japan from a two-decade economic slump, but he faces resistance from entrenched special interests (Heritage, 2015). The financial sector is competitive but vulnerable to political influence; the government retains considerable shares in the banking sector, which includes 100 percent ownership in Japan Post Holding as of 2014 (Heritage, 2015). Japan is a significant power in world trade, but its economy continues to operate below potential because of implications of their systems. Led by the Bank of Japan’s aggressive monetary easing, Japan is making progress in ending deflation, but demographics - low birthrate and an aging, shrinking population - pose major long-term challenges for the economy (CIA, 2016).
Japan’s trade balance position from 1980-2010 has recorded a surplus every year because of rising exports. As seen in Table 1, because of the Fukushima nuclear disaster in 2011, the trade balance went into a deficit as the Japanese yen weakened and imports have surged with an increase of purchases of fossil fuels and gas (Trading Economics, 2016). However, Japan did recover from the largest deficit on record in 2014 of a negative 2795 JPY billion. In April of 2016, Japan recorded a 824 JPY billion surplus which beat the market consensus and was the largest surplus since 2010. This surplus occurred because exports dropped 10.1%, while imports shrank at 23.3% (Trading Economics, 2016).
Taking a look at the volume of exports and imports over the last 10 years as seen in Table 2, there was a sharp drop for both in 2009 due to the global recession that occurred which hit Japan hard. The sharp large drop in world trading in 2009 helped to boost the size of the rebound in 2010 for a positive 11% for imports and 25% for exports (IMF, 2016). The earthquake and tsunami affected the exports of the country in 2011-2012 negatively as seen in the chart also. When Japan joined the Trans-Pacific Partnership in 2013, it opened Japan's economy to competition and export opportunities for Japanese businesses as we see a 8.3% jump in the volume of exports in 2014 (IMF, 2016). However, over the last two years, growth has been slowed because of shrinking sales to China that hurt the volume of shipments. Weak overseas demand may be pushing the economy into recession.
In Table 3, Japan’s GDP can be analyzed for the past 10 years with its ups and downs. The GDP in Japan was 4,602 billion US dollars in 2014, which represents 7.42% of the world economy (Trading Economics, 2016). GDP reached an all-time high of 5,955 USD billion in 2012. This is due in part to the reconstruction after the earthquake and tsunami disaster that boosted the economy. GDP has declined since 2012, due to tax rate hikes to raise government revenue for their huge government debt, which accounts for more than 230% of GDP (CIA, 2016). However, Abe just announced in June 2016, this sales tax hike would be delayed 2.5 years because of weak consumer spending.
A Reuters article in the beginning of June, explained that, “mindful of opposition criticism that the delay is a sign his "Abenomics" stimulus policies have failed to spur growth, Abe justified the decision, saying it was needed to forestall risks posed by external factors - notably slowing Chinese growth” (Kajimoto & Kihara, 2016). Shinzo Abe was quoted, "Abenomics has been steadily producing results, but the global economic environment has changed unexpectedly quickly in the past year. The biggest risk is the slowdown in emerging economies. Faced with global risks, we must fully reignite the engine of Abenomics and speed up efforts to escape deflation" (Kajimoto & Kihara, 2016). Economists have beliefs that this postponement could signal that the government is losing control of fiscal discipline (White, 2016). In the final quarter of 2015, consumer spending slumped and the economy contracted 1.4%, which added salt to the wounds of policymakers already wary of damage the financial market rout could inflict on recovery. The private consumption, which makes up 60% of GDP, fell 0.8% showing signs that Abe’s stimulus policies have not been successful thus far to boost household spending (Reuters, 2016). This data has shown the challenges that Abe faces to pull the economy out of stagnation, as exports fail to gain enough momentum to make up for soft domestic demand (Reuters, 2016). Further gains in the yen could lower export profits and discourage companies from increasing investment and wages. Prime Minister Shinzo Abe said he will announce additional economic actions this fall, but economists worry this approach could mean not enough money will be pushed towards reversing the population decline or speeding up the growth (White, 2016).
GDP recovered from the contraction in the final quarter of 2015, and growth was boosted through March 2016 because of the leap year that resulted in an extra day of spending. “I still think the outlook for business investment is quite shaky,” Izumi Devalier, an economist for HSBC Securities Asia, said on Bloomberg TV. “Japanese companies are still dealing with a lot of uncertainty in the global outlook” (Ujikane, 2016). A slowdown in foreign demand and the yen’s strength remain risks for remainder of 2016.
In spite of the prolonged economic stagnation, the ten-year job retention rate of core employees in Japan has been stable around 70% over the last 25 years (Kambayashi & Kato, 2012). The unemployment rate in Japan was recorded at 3.2% in April of 2016, which was unchanged from March and in line with expectations. It reached an all-time high of 5.60 percent in July of 2009, but averages 2.73% over the last 60 some years (Trading Economics, 2016).
Looking at the job market statistics in Japan, the labor market does seem strong. Looking at Table 4 of the past two decades, the unemployment rate is at the lowest level in over 21 years. The tight labor market however is driven by not an increase in jobs available but also decline of job applicants. Since 2013, job offers increased by 25%, but job applicants declined by 22% (Japan Macro Advisors, 2016). Again, the population crisis has had an effect on this because it seems they are running out of people to employ.
Household spending trends have had a slower growth than that of the economy of Japan as shown in Table 5. As a result of a tax rate hike from 5% to 8% that was implemented by the Abe and the Japanese government in 2014, consumer spending dropped significantly. Household spending in Japan declined by 0.4 percent year-on-year in April of 2016, following a 5.3 percent drop in March. This averaged -0.73 percent from 2001 until 2016, reaching an all-time high of 7.20 percent in March of 2014 and a record low of -10.60 percent in March of 2015 (Trading Economics, 2016). As private consumption and household spending declines, this affects the GDP as discussed above. Many people of Japan are on the fence of the Prime Minister’s delay to the consumption tax hike, which would have raised the rate to 10% from the current 8% (Otake & Aoki, 2016). The delay, however, could help increase household consumer spending and alleviate the burden it would have had on Japanese families’ budgets.
Inflation rates are low in Japan also compared to most other countries. Consumer prices in Japan dropped by 0.3 percent in April of 2016, compared to a 0.1 percent fall in March and matched market expectations (Trading Economics, 2016). It is the 2nd month of decline as prices of food, cost of housing, and transportation declined further. Table 6 shows the last 10 years of inflation rate changes which reflect upon the economy Japan has experienced. Inflation Rate in Japan averaged 3.10 percent for the past 60 years, with a record low of -2.52 percent in October of 2009. In January of this year, the Bank of Japan stunned the market and cut interest rates below zero in an effort to stimulate the economy as volatile markets have threatened its efforts to overcome deflation (Reuters, 2016). Companies remain cautious of raising wages, adding to rising market doubts that inflation will push toward 2% as fast as the Bank of Japan has projected. The Bank of Japan has predominantly blamed falling oil prices for keeping inflation restrained and has argued that it is instead slowly improving (Reuters, 2016). But, the central bank's own inflation index, which excludes the effect of energy and fresh food costs, may show that slow-moving domestic demand may have more to do with deflation.
UNCTAD report for their 2015 Country Fact Sheet, which contains the most recent data related to FDI flows, can be seen for Japan in Table 7. It shows that FDI inflows are significantly less than outflows, in which Japan as given little incentive to multi-national corporations to invest. The FDI in Japan has been slow compared to other economies that have picked up. Japan still trails many industrialized countries and emerging economies in Asia and other regions with the comparison of FDI to GDP. The Abe administration’s economic reform alluded to doubling FDI in Japan to 35 trillion Yen by 2020 by taking steps to use their overseas visits to persuade foreign businesses to invest in Japan (The Japan Times, 2014). FDI in Japan was only at $2.3 billion in 2013, even though that represented a 33 percent increase from the previous year. Japanese businesses are expanding their investments internationally, but the shortage of investments in Japan has been gloomy and affects the prospects of job creation, tax revenue, and income for the country. The Abe administration supposedly plans to cut the corporate tax rate to levels that are in line with many European and Asian economies that will help attract more FDI in Japan, while also persuading Japanese firms to invest more domestically (The Japan Times, 2014).

Conclusion In conclusion, an overlook at Japan’s economy as seen in Table 7, shows that currently growth is extremely slow and sluggish. Japan is struggling as compared to other industrialized countries and regions. All the factors and data have pointed to Japan heading towards recession, if not there already.
According to the IMF, the world economy overall has been weak in advanced economies and growth has been modest over the past year. The IMF projects that global recovery will strengthen in 2017 and beyond, as stressed economies will gradually normalize again. However, it is dependent upon many factors and risks that could stagnate the economies. Japan’s government will need to take action to try to alleviate any downfalls that could hinder economic performance and growth. There is not a cure-all for economic crises and changes to one aspect almost always have an effect upon another aspect. Japan will need to do what’s best for its people and help to ease their country back into being a force in the global economy. Growth will not occur overnight, but a long-term plan will need to be implemented and followed through. Only time will tell if Abe’s economic reform will help to see changes occur in Japan by 2020.
Recommendations
The first recommendation is creating a way to reverse the demographic issue in Japan. If the population trends continue as they will, there will not be enough working people to support the retirees. As we saw in the data analysis, this affects many aspects of the economy in Japan and is a major factor that will need addressed in order to continue to grow as a country. Shinzo Abe and the government need to tackle this problem head on and come up with a plan to bring in new, young people to the country to boost the economic growth. While the government cannot force dramatic increases in birth rates, they should look to immigration stimulus. Japanese policymakers and the Abe administration have expressed their concerns about the aging and declining population, but have been stagnant thus far on making any significant immigration policy changes.
The Ministry of Justice has held ‘consultation meetings’ with stakeholder representatives and experts to discuss immigration policy, but the committee has only agreed to modest reforms alleviate workforce decline (Peng, 2016). The UN estimates that Japan would need to receive 17 million immigrants between 2005 and 2050 for it to maintain its population level at 127 million (Peng, 2016). Japanese public opinion has also shown the resistance against increasing foreigners and is mostly negative in rural Japan, where the population demographics are the most severe. The government and Ministry of Justice should consider changing their outlook towards immigration if they want to maintain population levels. Immigration reforms and loosened policies would be a good start to attract foreigners to the country.
The second recommendation is to find a way to attract more FDI inflows. By receiving FDI inflow, the Japanese economy can be revitalized. The Abe administration will need to make the market in Japan attractive to MNCs and improve foreign businesses’ outlook on the Japanese market potential. Looking at expanding free-trade agreements would be a good start by expanding regional trade and increasing inward investments, which can drive up the nation’s growth potential (The Japan Times, 2014).
Continued agreements and negotiations with the TPP is a must in order to create those export opportunities and competition to show other country’s that Japan is a good place for business and to bring their dollars to the country. The effort to improve foreign businesses’ opportunities of the Japanese market’s growth potential is a must in order to get Japan back on the map as a place to invest money.
The third recommendation is to come up with a strategy to rein in Japan’s enormous government debt. Abe claims to not have abandoned his pledge to bring the primary budget balance into surplus by 2020, but his claims are already looking intangible (Kajimoto & Kihara, 2016). He has offered few clues on how Japan will make up this gap that is now created by the delay of the tax rate hike into 2019. He only has told the public that he will keep reflating growth so tax revenues will continue to increase (Kajimoto & Kihara, 2016). The debt trajectory will continue to rise if Japan’s government doesn’t take action to decrease the public sector debt. Although Abe’s administration pledges to be working on this, the reliance on economic growth alone is not a cure-all. They will need to prioritize economic reforms, monitor inflation and interest rates, and revisit tax hike delays in coming years to battle this debt. This is extremely important for the government to focus upon as this is a very negative aspect of the Japan. Other countries may not want to invest in the Japanese economy if the government debt is so astronomical and they cannot take control of their own finances.

References
CIA. (2016, January). The World Factbook: Japan. Retrieved from CIA: https://www.cia.gov/library/publications/the-world-factbook/geos/ja.html
Heritage. (2015). 2015 Index of Economic Freedom: Japan. Retrieved from Heritage: http://www.heritage.org/index/country/japan
IMF. (2016, April). World Economic Outlook Database. Retrieved from International Monetary Fund: http://www.imf.org/external/pubs/ft/weo/2016/01/weodata/weorept.aspx?sy=2006&ey=2016&scsm=1&ssd=1&sort=country&ds=.&br=1&pr1.x=64&pr1.y=3&c=158&s=TM_RPCH%2CTX_RPCH&grp=0&a=#download
Japan Macro Advisors. (2016, May). Japan Unemployment Rate. Retrieved from Japan Macro Advisors: https://www.japanmacroadvisors.com/page/category/economic-indicators/labor-markets/unemployment-rate/
Kajimoto, T., & Kihara, L. (2016, June 1). Japan PM delays sales tax hike, puts fiscal reform on back burner. Retrieved from Reuters: http://www.reuters.com/article/us-japan-economy-tax-idUSKCN0YN2W1
Kambayashi, R., & Kato, T. (2012). Trends in Long-term Employment and Job Security in Japan and the United States: The Last Twenty-Five Years. Retrieved from Columbia University: http://academiccommons.columbia.edu/catalog/ac%3A146976
Luthans, F., & Doh, J. P. (2015). International Managment: Culture, Strategy, and Behavior. New York: McGraw-Hill Education.
Otake, T., & Aoki, M. (2016, June). On streets of Tokyo, opinion divided over tax-hike delay. Retrieved from Japan Times: http://www.japantimes.co.jp/news/2016/06/01/national/streets-tokyo-opinion-divided-tax-hike-delay/#.V1mUmlUwjcs
Peng, I. (2016, June). Japan and its immigration policies are growing old. Retrieved from East Asia Forum: http://www.eastasiaforum.org/2016/06/07/japan-and-its-immigration-policies-are-growing-old/
Reuters. (2016, March). Japan February consumer inflation flat, keeps BOJ under pressure for further stimulus. Retrieved from CNBC: http://www.cnbc.com/2016/03/24/japan-february-consumer-inflation-flat-keeps-boj-under-pressure-for-further-stimulus.html
Reuters. (2016, February). Japan GDP -1.4% on-year in Q4. Retrieved from CNBC: http://www.cnbc.com/2016/02/14/japan-economy-shrinks-14-percent-on-year-in-q4-gdp-04-percent-on-quarter.html
The Japan Times. (2014, July). Increasing FDI in Japan. Retrieved from Japan Times: http://www.japantimes.co.jp/opinion/2014/07/23/editorials/increasing-fdi-japan/#.V17aJVUwjct
Trading Economics. (2016). Japan Economic Indicators. Retrieved from Trading Economics: http://www.tradingeconomics.com/japan/indicators
Ujikane, K. (2016, June). Japan's GDP Grows More Than Initial Reading in 1st Quarter. Retrieved from Bloomberg: http://www.bloomberg.com/news/articles/2016-06-07/japan-s-economy-grows-more-than-initial-reading-in-first-quarter
UNCTAD. (2015, June). Country Fact Sheet: Japan. Retrieved from UNCTAD: http://unctad.org/sections/dite_dir/docs/wir2015/wir15_fs_jp_en.pdf
White, S. (2016, June). Japan First-Quarter GDP Revised Up, Boosted By Leap Year Gain. Retrieved from Reuters: http://www.reuters.com/article/us-japan-economy-gdp-idUSKCN0YU02W

Appendix

Table 1: Japan Balance of Trade 2006-2016 (Trading Economics, 2016)

Table 2: Japan Volume of Imports and Exports 2006-2016

(IMF, 2016)

Table 3: Japan GDP 2006-2014

(Trading Economics, 2016)

Table 4: Japan Unemployment Rate

(Japan Macro Advisors, 2016)

Table 5: Japan Household Spending 2006-2016 (Trading Economics, 2016)

Table 6: Japan Inflation Rate 2006-2016

(Trading Economics, 2016)

Table 7: Japan FDI Flows 2005-2014

(UNCTAD, 2015)

Table 8: Japan Economy Overview

(Trading Economics, 2016)