Global Economy and Japan

National borders no longer delineate economic limits in the modern global economy, which is characterized by globalization and the information technology revolution. The emergence of Asia is one of the most striking aspects of the current globalized age. The highly developed overseas divisions of Japanese corporations served as a crucial foundation for the growth of Asian economies and industries. Additionally, the expansion of free trade and investment in the region may be sparked by and supported by the revival of the Japanese economy. In 2016, the economy of Japan produced $4.7 trillion, based on purchasing power parity, making it the fifth largest economy in the world, after China, the EU, the US, and India (Amadeo, 2017). However, the economy only grew by 0.5%. The population of Japan stands at 27 million, with a GDP per capita of $38,000, at position 44 globally, with a standard of living higher than China or South Korea, but lower than those of the US and the EU. Japan features a mixed economy, which is based on capitalism, with the government working closely with industry. The largest exports are automobiles, semiconductors, and steel products. Oil and liquid natural gas represent the major import commodities.

Recent Developments in the Japan’s Economy

In recent times, the economy of Japan has expanded at the most rapid pace that has been recorded for two years, on the back of domestic spending, with the country preparing to host the 2020 Tokyo Olympics. In addition, low levels of employment have encouraged businesses to make investments (Partington, 2017). Data showing an annualized 4% rate increase in second-quarter GDP revealed that Japan was the fastest growing of the G7 group. Japan seems to be shrugging off decades of sluggish growth, which the government has attempted to address through concerted money printing programs promoted by Shinzo Abe, the Prime Minister. This has been in an effort to stimulate investment from companies, lending by banks, and spending of the part of consumers (Hilpert, 2015).

Shinzo Abe became Japan’s Prime Minister for a second term. He triumphed in 2012 on the back of promises of economic reforms to shake off a 20-year slump. “Abenomics” bears three major components referred to as the “three arrows.” Initially, he instructed the Bank of Japan to institute expansive monetary policies via quantitative easing. This lowered the Yen’s value from $.013 to $.0083 between 2012 and May 2013 (Holman, 2014). Having a cheaper Yen ought to have translated into increased exports. However, Japanese companies did not follow up with an increase in exports, while others failed to lower their international rates, pocketing the profits instead (Amadeo, 2017). Moreover, other companies had already outsourced production to lower cost territories, so that the devaluation did not confer any advantages. Therefore, the devaluation hurt companies in Japan that relied on imports, through rising costs. Consumers also felt the pinch by paying more for imported goods.

Secondly, the Prime Minister introduced the expansive fiscal policy. There was an increase in infrastructure spending, with a promise to offset a rising 225 percent debt-to-GDP ratio, through a 10 percent consumer tax. The 2014 consumer tax flopped, with the economy briefly returning to recession. Thirdly, Abe promised structural reforms, with an emphasis on modernizing the country’s Agriculture industry. His route was to reduce tariffs while expanding the sizes of plots. This put him on a collision course with the powerful rice lobby. However, in 2015, the Central Union of Agricultural Cooperatives agreed to reduce their powers over the industry. This facilitated government action towards more efficient production techniques.

Characteristics of the Japanese Economy impairing Growth

Kieretsu

It refers to the structured interdependent associations between distributors, suppliers, and manufacturers (Amadeo, 2017). Such a system bestows monopoly-like powers on manufacturers to control the supply chain. This also reduces the influence of free market forces. Consequently, new and innovative entrepreneurs are unable to compete with the low-cost system. It further discourages foreign direct investment

Guaranteed Lifetime Employment

In the guaranteed lifetime employment system, companies hire college graduates, who stay up to retirement. In the wake of the recession, this strategy proved unprofitable and unsustainable. In 2014, only 8.8% of the companies in Japan were running such programs. Nevertheless, 25 million workers, aged between 45 and 65 years, are still under the system (Amadeo, 2017). In addition, most possess outdated skills and are simply waiting for retirement. This is a burden to corporate competitiveness as well as profitability.

Aging Population

The presence of a large proportion of an aging population implies that the country has to pay out more retirement benefits compared to what it receives in income taxes. The country has had to hire temporary workers from neighboring South Asian nations while keeping immigrants at bay. Such a strategy further reduces the potential customer base (Stratfor, 2015).

Other Notable Features of the Japanese Economy

The yen-carry trade is attributable to the low-interest rates in Japan. Consequently, investors borrow low-cost yen money and invest in higher returns currencies, for instance, the U.S. dollar. This is one reason for the dollar’s value soaring 15% in 2014. A lower yen often increases the prices of imported goods, resulting in inflation (Amadeo, 2017). In addition, considering the massive debt-to-GDP ratio in Japan, it owes more than twice what it annually produces, with the major debt owner being the Bank of Japan. This has allowed the country to continue spending without worrying about higher interest rate demands from lenders. Japan is also the world’s largest net food importer.

Effect on Other Economies

The Bank of Japan was the greatest holder of U.S. Treasurys before China took over in 2008. Both China and Japan apply this strategy with the aim of maintaining the value of their currencies lower compared to the dollar. This is supposed to ensure that their exports are competitively priced. However, the strategy pushed Japan’s debt to 182% of GDP output, way before Abenomics.

A low yen has also made Japan’s auto industry very competitive. This is the reason Toyota became the number 1 automaker globally in 2007. However, if the central bank concludes that a low yen is not promoting growth, and oil prices are on the rise, then it could boost the yen in order to minimize inflation. It would also purchase fewer Treasury bond, leading to an increase in yields, while bossing U.S. interest rates.

Japan’s Future Priorities for Recovery and Growth

The Japanese government has pledged to institute growth strategies over both the medium and long-term, with the major aims being to increase the competitiveness of domestic firms, overcome energy shortfalls, and promote innovation. In addition, some of the major restructuring is to include doing away with institutional obstacles, including domestic regulation frameworks (Naoyuki & Farhad, 2014).

Growth Strategies of Current Japanese Administration

The following are major aspects of the Japan growth strategy as identified by the Minister of Finance in 2014:

Encouraging companies to increase their employees’ wages, with a view to promoting domestic consumption.

Increase taxes in order to cater for increasing social security spending.

Considering the aging population of Japan, the government is trying to encourage increased female participation within the labor force. This is partly being implemented by improving childcare facilities. In addition, the government is trying to encourage retired citizens to continue working.

There has been a significant increase in the medical costs of for the elderly.

The government is monitoring medicine and healthcare prices so that there are no major variances with market pricing. In addition, the government recognizes the need for implementing a regional medicare program.

The government is ensuring that there is adequate funding to support disaster preparedness programs. The government will offer more scholarships to students, while increasing expenditure for research and development.

The government will ensure that there is funding available for repairing or upgrading aging infrastructure.

The government will ensure that there are easy financing options for Small and Medium Enterprises, especially for research and development

Considering that the farming population is aging, the government will ensure that there are sufficient funds to encourage and efficient and competitive agricultural sector. According to a recent OECD report, the Japanese economy has gained momentum and is creating jobs.

According to the report, per capita growth rates in the recent times are matching those across the OECD, which is a major improvement (OECD, 2017). It seems that ‘Abenomics’ has played a key role in the revival of the economy, albeit minimally.

More action needs to be taken in order to solidify the gains and ensure that there is sustained economic prosperity and well-being, in spite of high government debts and a drastically shrinking workforce. The report further identifies priority sectors, including more efforts towards increasing labor force participation and inclusivity, the creation of more ‘regular’ jobs, particularly for women, increasing productivity and placing public finances on a sustainable track. Within the labor market, employment opportunities for females ought to be expanded. In order to achieve much stronger and more sustainable productivity, successes should result in more inclusive growth, which distributes the dividends fairly across society (OECD, 2017).

In addition, considering the labor market shortages associated with an aging population, it is critical that Japan does away with any obstacles to female admission into the workforce, particularly by ensuring that childcare is affordable. In addition, the enduring culture of long working hours should be changed, potentially through a binding ceiling on overtime work. Such a strategy would also improve work-life balance across the country (OECD, 2017). It would also be instructive to break down dualism within the labor market. The prevailing segmentation of ‘regular’ and ‘non-regular’ workers, who have varying levels of pay, benefits, and employment protection, is hampering efforts to entrench inclusive growth trajectories (OECD, 2017).

A sustained increase in health and pension spending, which are associated with population aging will further increase pressure on government debt, which rose to 219%, which is also the highest level ever recorded within the OECD (OECD, 2017). Consequently, in order to ensure long-term fiscal sustainability, it is critical to implement a detailed and reliable fiscal plan that will decrease the debt ration going forward. Some of the key recommendations for controlling public spending while raising additional revenues include gradually increasing consumption tax and environmental taxes (OECD, 2017).

An increase in productivity would help the country address both fiscal and demographic challenges while making growth more inclusive and sustainable. In addition, any reforms that have the capacity to narrow the productivity gaps witnesses between manufacturing and service industry companies, as well as those between SMEs and large multinationals would facilitate the above dual objectives. Some of the priorities may include improving the personal bankruptcy system in order to facilitate the exit on non-viable firms while encouraging entrepreneurship and an increase in Japan’s integration within the global economy.

Conclusion

Japan had a somewhat good year in 2016 with a 1.3% growth projected for 2017 (IMF, 2017). This seems to be largely as a result of a favorable external economic environment, implying higher exports. Underlying domestic private consumption and related investment, however, remain moderate. This may present challenges for efforts to sustain medium-term growth.

Considering the population dynamics and a projected gradual decline in the labor force, Japan has to make labor more inclusive and efficient. More women will have to be admitted into the workforce in regular or full-time positions, not to mention on the principle of equal pay for an equal work. Consequently, labor contract reforms, the elimination of full-time and regular work disincentive are critical. In addition, child and elder care programs have to be improved. Most of these issues are already covered in the administration's Work Style Reform plan, although they could still be accelerated.

Financial sector policies aiming at efficient credit allocation to both small and medium-sized outfits could promote productivity, innovation, and investment, Similarly, financial institutions across Japan would have to adapt to the challenges associated with a prolonged low-interest rate and low-growth environment, not to mention an aging and shrinking populace. This implies adapting or adjusting business models, for example, by reducing costs, through higher fee-based income, and consolidation, and being mindful of potential sources of risks when exploring profitable ventures.

There has been a proposal for a consumption tax. An increase in the consumption tax rate could stabilize and eventually reduce public debt. An aging population will also result in increased demands for social security expenditure, mainly for healthcare. In order to curb such emerging costs, expenditure reform will be necessary. Additional revenue will also be required to finance such public spending. Excessive consumption is not a key problem for Japan. Income tax may also require reforms in order to address inequality, broaden the tax base, and eliminate work disincentives.

References

Amadeo, K., 2017. Japan's Economy: Abenomics, Recession and Impact on U.S. Economy. [Online] Available at: https://www.thebalance.com/japan-s-economy-recession-effect-on-u-s-and-world-3306007[Accessed 26 November 2017].

Hilpert, H. G., 2015. Japan after two years of "Abenomics": monetary illusions, timid reforms. Social Science Open Access Repository.

Holman, J. W., 2014. Japan at the Brink. Japan's Multinationals adapt even as Abenomics falters. [Online] Available at: https://www.wsj.com/articles/holman-jenkins-japan-at-the-brink-1416356744[Accessed 26 November 2017].

IMF, 2017. For Japan's Economy, Now Is the Time to Step Up Reforms. [Online] Available at: https://www.imf.org/en/News/Articles/2017/07/31/NA073117-For-Japan-Economy-Now-Is-the-Time-to-Step-Up-Reforms[Accessed 26 November 2017].

Naoyuki, Y. & Farhad, T.-H., 2014. An Analysi of Challenges Faced by Japan's Economy and Abenomics. The Japanese Political Economy, Volume 0, pp. 1-26.

OECD, 2017. Japan: Boost employment and productivity to promote inclusive growth and meet demographic challenges. [Online] Available at: http://www.oecd.org/japan/japan-boost-employment-and-productivity-to-promote-inclusive-growth-and-meet-demographic-challenges.htm[Accessed 16 November 2017].

Partington, R., 2017. apanese economy posts longest expansion in more than a decade. [Online] Available at: https://www.theguardian.com/world/2017/aug/14/japanese-economy-posts-longest-expansion-in-more-than-a-decade[Accessed 26 November 2017].

Stratfor, 2015. Forecasting Japan: The Failure of Reform. [Online] Available at: https://worldview.stratfor.com/article/forecasting-japan-failure-reform[Accessed 26 November 2017].