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The Issues With Japan’s Economy

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The Issues With Japan’s Economy

The Issues with Japan’s Economy

It is no secret that the economy in Japan has struggled for years. 

Even though massive amounts of monetary and fiscal stimuli have been introduced into the economy, they have failed to encourage growth up to this point. 

The Bank of Japan is meeting later this week to decide whether or not they need to put more effort into stimulating their economy.

Here is what the leaders of Japan are currently facing:

  • 26.3% of the population in Japan is over the age of sixty-five.
  • The fertility rate in Japan is at 1.4%
  • 1.6% of the population are international migrants.

When you compare these statistics with the median for other countries in the world, it looks like this:

japan's economy 1

Japan has the oldest population anywhere in the world. 

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When you combine this with the birth rate being low and little immigration taking place, you realize the severity of its growth issues.  

However, these issues go far beyond the surface concerns.

At the beginning of the 90’s, Japan saw a collapse of its postwar boom in growth. 

This was followed by years of deflation. 

Eventually, Japan began to experience worker shortage on top of everything else.

Japanese people tend to be unwilling to spend their money. 

This causes companies to seek outside the country to invest and make money rather than investing in their economy. 

This trend is sparked further due to the absence of deregulation.

Not only are wages motionless but growth continuously remains near the ground as well. 

On top of all of this, the country experiences recurrent recessions. 

Other issues for the economy include:

  • Investment remains below the pre-crisis level
  • They have been unable to overcome deflation ultimately

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And the Debt Pile Increases

Japan’s burden of debt is much worse than what is found in other countries. 

This debt is primarily due to the stimulus that is regularly introduced to try and stimulate growth within the economy. 

Prime Minister Shinzo Abe has come up with a rescue plan known as Abenomics.

However, this plan has further weakened the economy. 

It has boosted the profits to the corporate organizations, but both wages and the amount of spending that take place on a domestic level remains low.

The government thought about raising the sales tax to gain more revenue and begin to work their way out of this high debt. 

The problem is that they tried this back in 2014.

When they did, both the gross domestic product and the amount of consumer spending fell. 

This resulted in the economy going back into a recession. 

The following shows what happened to each due to the raise in the sales tax:

japan's economy 2

The decision made by the government to put off introducing any additional increases in the sales tax at this time could have potentially reduced the likelihood that Japan will fall into yet another recession. 

However, refusing to raise the sale tax came at a price. 

Investors that were hoping to see the country take on its outstanding debt were severely let down.

The Struggle to Increase Inflation

In 2013, the Bank of Japan began their asset-purchase program. 

This program did allow the balance sheet to increase GDP outside what has been accomplished by numerous other well-developed economies. 

The stock looks like the following in comparison to other countries:

japan's economy 3

Aggressive easing resulted in the following:

  • The monetary stimuli that were introduced caused the yen to weaken.
  • Exporters were able to reap the benefits of this plan until earlier this year.
  • Corporations begin to enjoy even more profits.
  • The prices for stocks began to rise

The issue is that consumer spending still has not followed suit. 

The Bank of Japan remains a long distance away from obtaining its target of two percent. 

Inflation also has refused to fall in line.

The issue gets even worse when you look at the fact the yen strengthens again this year. 

The yen is considered as a haven when the world is full of so much uncertainty globally.

How to Fix the Problem

The Bank of Japan continuously says that it will do whatever is needed to reach its target. 

Bold and progressive measures have even been promised by Abe for the fall. 

However, with stimulus continuously failing to encourage growth, policy makers and economists alike are reporting that more intense measures are going to be needed. 

Here are some solutions to the problems faced by Japan and the obstacles standing in their way.

Solution Issue
One solution is to expand the current workforce.  This could be done by including the promotion and hiring of women employees.  Older employees could also be allowed to continue working for a longer period. Traditions in the cultural workforce and the inflexible seniority systems that exist within companies make this difficult to achieve.
Promote immigration to offset the effects of the abundantly aging population. Policymakers and the general population are against immigration.
Produce larger amounts of revenue to lower the debt. Consumers and companies are against increasing the amount of taxes they have to pay and increasingly put pressure on the government so they will not increase these costs.
Establish changes within the industrial and labor markets to provide work practices that are more flexible and eventually raise wages. Resistance is coming from some places.  Resistance includes unions, industries, some employees, and the political will to do this seems to be missing.

 

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