Introduction
The economy of Japan has seen a downturn with the economic crisis in the year 2008. Every country has been faced with the consequences that resulted in different impacts. The paper will present the economic indicators and overall economic situations in the Japan. The background of the country’s economic policies will be present, with international and regional trade agreements. The focus will be on presenting the specific economic data along with the definitions and interpretations. Further on, the current state of the country’s economy will be examined in the light of trade, fiscal and monetary policy.
Background on the country and recent economic policies
Japan is one of the most developed countries in the world with the highest standard of living among all world nations. The Japanese economic growth has been seen since the Second World War. The recovery after the war began with the rapid growth of the economy. Japan was open to international trade after 1858 where it started to export goods that had lower prices at home, such as silk and tea, and import the goods that were more expensive in Japan, such as wool and cotton. The trade agreement contributed to the today possibility of importing natural resources that are scarce in the country such as oil and export in manufacturing that employ the capital and highly skilled workers (Flath, 2014).
There were various challenges ahead of the Japan economy. One of them is the economy crisis in 2008, which has impacted the Japanese economy and resulted in slowdown of trade. The decline and global demand for the main exports products on which the country is dependent on resulted in economic decline. Other factors that challenged the economy of the country were also earthquake, tsunami and nuclear accident in 2011. The total recovery has not yet been reached. In the last two decades, Japan has seen slow economic growth and recessions (Cooper, 2014).
There have been various economic policies implemented in the recent times. One of the most important has is called “Abenomics” with flexible fiscal policy, aggressive monetary policy and growth strategy with promotions of investments. The policy resulted in the real and nominal GDP increase and improved surroundings of different companies. The employment and income had improved and the wages increased. Japan is beside the mentioned layers of economic policy trying to improve its economic situation with the international cooperation and trade with building the economic zones that can help the country boost the national economy (Cabinet Office, 2016). The implications and targets regarding the fiscal and monetary policy will be examined on more detail in the current status of the country in the current fiscal and monetary policy.
Discussion: trade agreements and international economic expansion
Based on the World Trade Organization (n.d.) Japan has various regional trade agreements with various countries. The country has signed and has established free trade from the year 2002 onward inside and between various countries and the Association of Southeast Asian Nations - ASEAN organization. The free trade agreement with Japan exist with Brunei Darussalam, Chile, India, Australia, Indonesia, Malaysia, Mexico, Peru, Philippines, Singapore, Switzerland, Thailand and Viet Nam. The free trade agreements differ based on the coverage, one are focused on goods and others on goods and services, implementation time and end of implementation period. Japan has also announced and is negotiating about the free trade agreement with the European Union, Gulf Cooperation Council and Republic of Korea (World Trade Organization,n.d.). The country has been international involved and has various international, global and regional trade agreements as already presented. The most important recent regional trade agreements in recent times are therefore China-Japan-South Korean Free Trade Agreement from 2012, Trans-Pacific Partnership since 2013 and Japan-Australian Economic Partnership Agreement from the year 2014 (World Trade Organization, 2015.). Form the year 2005 the country has started to get more involved with the international community in a sense of making international trade agreements. The international economic agreement expansion and formation have been therefore seen since the Second World War.
Discussion of economic data
The economic data discussed were retrieved from the World Bank database. The GDP at market prices expressed in current US$ presented in the Table 1 has been decreasing from the economic crisis onward and the trend has continued in the recent years 2012, 2013 and 2014. It consists of the sum of gross value added by all resident producers along with the product taxes and without subsidies included in the value of products. The decreased GDP is showing the economic decline in trades because of the decreased global demands. The GDP has been in the recent data available, for the year 2014 $4,601,461,206,885.00. Japan is confronted with the aging population and the decreasing number of the population. The trend is seen also in other developed countries where the number of people born is lower than the number of deaths. The total population was in 2014 127,131,800. Another important indicator of the development is GDP per capita, which has been increasing in the years 2012, 2013 and 2014. The indicator shows gross domestic products converted to international dollars with using the power parity rates. The increase is a signal of the economic growth after the economic crisis and shows a slight increase in the productivity. It is one of the most important indicators of economic performance. The GDP per capita was in 2014 $37,595.20 (World Bank, 2015). It can be used to express the standard of living, which it seems that has been increasing, but based on the OECD (2015) the country has seen a vast decline in the living standard in recent years prior the 2015. The reason why it cannot be used as a simple presumption of the living standards is because it does not measure the personal income but is based on purchasing power parity. The comparison with other developed country would give, clearer results since it is adjusting the difference in the cost living among different countries. Another important indicator is the Foreign Direct Investment - FDI that have been recovering since the last global economic crisis and have been increasing in all three examined years. It is resulting in the increased global business with the involvement of foreign enterprises and investors. FDI inflow has been in 2014 $37,595.20. The FDI increase can be a result of the increased productivity and global business partnering. The increasing rates are showing the development progress and further increasing can help the country achieve necessary financial investments for the projects. On one side the inward direct investment by non-resident investors were increasing and the outward direct investments – FDI outflows by the Japanese residents decreased from 2013 to 2014 for around 40%. The decrees can be a result of the weak economic performance. The FDI is showing the economic integration of the Japan in the global economy and are showing the foreign direct investment and is composed of the income on the intercompany debts and equity. The next indicator is the balance of payments, which has been decreasing, which is showing the international economic transactions in a year. The balance of payments is expressed with the current account balance – BoP, which is the sum of the exports of goods and services, net primary and secondary income. In 2014 was at $24,020,721,717.00. The decreasing of BoP is showing that the imports have exceeded the exports of goods, services and financial capital. The country imports have been increasing in the examined years. The imports in the year 2014 resulted in $1,053,941,700,826.00. The same can be said for the exports that have been on the increase. The exports in 2014 accounted for $1,096,911,000,000.00. The export and imports include goods, services and primary income. The interesting development indicator for Japan is also the energy imports as a % of the energy use. The indicator shows the energy use minus energy production measured in oil equivalents. The Japan is very dependent on the imports and international trade since it in 2014 imported 94% of the energy used. I found this indicator interesting and very import since it is the key component of leading foreign and economic policies. It has also increased since the nuclear accident in 2011. Another important indicator is also exchange rates, which is showing the exchange rate between yen and the United States dollar (World Bank, n.d.). The yen has dramatically fallen 50% in comparison to the dollar at the end of the year 2012 (McBride & Xu, 2016), but from the Table 1 we can see that the exchange rate has been improving in the examined years and was in 2014 at $105.94. The official exchange rate is referring to the exchange rate, which is calculated on an annual average of the local currency relative to the U. S. dollars. The country is among developed ones and had in 2014 based on the poverty headcount ratio at $1.90 a day expressed in the % of the population, 0% of the population living on less than $1.90 a day.
Source: World Bank, n. d.
Current status of the country
The deflation has resulted in the reduced living standards and has dropped based on the OECD (2015) below the OECD average. The country has vast government debt resulting in 226% of the GDP, which ranks the country in the first place among the developed world. The demographics with ageing population is increasing the public spending and results in the decreased economic growth. The country is beside the rising governmental debt faced with low growth, deflation and large deficits (OECD, 2015). The country is under various economic reforms.
Trade policy
The trade policy of Japan has been stable with negotiating about various free trade agreements with different global actors. The country is also pursuing the domestic economic reforms in order to improve its competitiveness and improve the overall economy. The authorities have been reporting that strengthening and maintaining the multilateral trading system has been one of the most important parts of the external economic policy. It is an important part of the WTO negotiations and dispute settlement. The Japan strategy of Basic Policy on Comprehensive Economic Partnership of 2010 has given a target to increase the free trade agreements ratio, which is showing the % of the volume of trade, to 70% by the year 2018, which was in 2010 at 19%. Currently Japan has singed 13 free trade agreements. It has been ranked on the 20th place in 2015 on the World Bank’s Trading Across-Borders Index (WTO, 2015). Trade to GDP ratio is showing the openness of Japan to international trade. Based on the World Bank the country had between 2011 and 2015 the trade to GDP ratio was 35. The trade-to-GDP ratio is low because of the large economy and a large population. The country has in trade absolute advantage in products of fish and tea. In 2012 the most comparative advantage in Japan was rice and tea and in 2013 and 2014 electronics, cars and vehicle parts, which are the most common export products of the country. As all countries also Japan has quotas and tariffs. The most important are custom law from 2013 and custom tariff law, temporary tariff measures law and cabinet order on tariff quotas from the year 2014 (World Bank, n. d.). The bank of Japan has in 2016 adopted the negative interest rate policy. The aim of such policy is to achieve the target of the government – 2% inflation in the near future (McBride & Xu, 2016). The trade policy is trying with more enhanced international cooperation, trade, improve the economic situation in the country.
Monetary and fiscal policies
Both monetary and fiscal policies have been changed with the policy of “Abenomics” in the year 2013. The monetary policy, including regulation, availability and costs of credits and the fiscal policy with the debt, taxes and governmental expenditures was addressed. Japan suffers from vast governmental debt. Based on the World Bank (n. d.), the governmental central debt shown as % of the GDP in 2012 was 169%. This is showing the severe economic challenges the country is facing. The top fiscal policy is reducing the governmental debt. The consequences of high debt are mitigated by the low long-term interest rates and the decreased of confidence which can result in rate growth. Besides the reduction of the governmental debt as fiscal actions the social cohesion is being promoted. The deficit has roots in the structural problems from rising public social spending with a weak nominal output growth, which hindered the government revenues (OECD, 2015). In order to improve fiscal and monetary policy the policy called “Abenomics” was introduced and includes monetary easing, fiscal expansion and structural reform. It has been introduced to get over the deflation, weak economic growth and increase the domestic demand and Gross Domestic Product - GDP growth. Fiscal stimulation started in the year 2013 and included various economic recovery measures with direct governmental spending. The package was targeting recovery of building critical infrastructure and other infrastructure destroyed in the tsunami and earthquake in 2011 that came on three different time periods in two years. The monetary policy has been stimulated with the injected liquidity with the quantitative easing policy. The monetary policy should result in the decreased exchanged rates and increase the exports. The structural reform in the policy involved the program of changed business regulations, along with the liberalization of the labor market and the agricultural sector. The program included cutting the corporate taxes and boosting the diversity in the workforce. The country has with attempts to lift the national economy become the country with the largest public debt among the developed nations (McBride & Xu, 2016).
Future of the country and conclusion
Japan must reduce the governmental debt, and work on improving the short-term macroeconomic indicators. This can be achieved by thee flexible fiscal policy. The deflation must also be reduced. The weak growth of the economy has brought the country to the various fiscal issues. The borrowing was the main source to boost the national economy and has reached the highest debt ever recorded by the OECD. The deflation has contributed to the reducing of nominal GDP. The country needs to diminish the impacts the earthquake and tsunami along with the nuclear disaster had on the economy. The country needs to implement the structural reform and address the issue of ageing population along with increasing the women’s participation in the workforce. The equality and diversity must be promoted. The new monetary and fiscal policy must be improved if the results are to bring the desired outcomes. The country can make a lot of improvements in the working area and reducing the public spending. The competitive advantage can be enhanced in various sectors and can improve the exports and international trade. The success of the introduced policy will be visible in the near future.
Work cited
McBride, James, Xu, Beina. 2016. Abenomics and the Japanese Economy. Council on Foreign Relations. Retrieved http://www.cfr.org/japan/abenomics-japanese- economy/p30383
Cabinet Office. 2016. Fiscal 2016 Economic Outlook and Basic Stance for Economic and Fiscal Management. Retrieved: http://www5.cao.go.jp/keizai1/2016/en0122mitoshi.pdf
Cooper, H. William. 2014. U.S.-Japan Economic Relations: Significance, Prospects, and Policy Options. Congressional Research Service. Retrieved https://www.fas.org/sgp/crs/row/RL32649.pdf
Flath, David. 2014. The Japanese Economy. Great Britain: Oxford University Press.
OECD. 2015. OECD Economic Surveys Japan. Retrieved http://www.oecd.org/eco/surveys/Japan-2015-overview.pdf
World Bank. N. d. Japan. Retrieved http://data.worldbank.org/country/japan
World Trade Organization. N. d. Japan. Retrieved http://rtais.wto.org/UI/PublicSearchByMemberResult.aspx?MemberCode=392&lang= 1&redirect=1
World Trade Organization. 2015. Trade Policy Review: Report by the Secretariat – Japan. Retrieved https://www.wto.org/english/tratop_e/tpr_e/s310_e.pdf
