Executive Summary

The following report has been
prepared as a course work for the subject of Issues in Global Business and
Strategic Concepts. The report analyses Japan’s current economic status and the
reasons behind the woes of the economy. Relevant Domestic and International
issues have been discussed briefly but in as much detail as possible.

A brief description of the
evolution of Japanese economy sets the scene for the analyses, which looks into
the post World War II economic situation and the development of the different
economic aspects under the light of Globalisation.  This follows up with the chapter on the
modern economy of Japan, which mainly discusses different aspects of
‘Abenomics’ –the different fiscal, monetary & regulatory reformations
designed and implemented by the incumbent Prime Minister Shinzo Abe of the
country.

The second chapter of the report
brings in the analyses of the possible issue that the Abenomics have been
trying to fight since 2012, and the likely problems that resulted even from
these new kind of policies. The analysis starts with a macroeconomic overview
of Japan, its economy, its foreign policies and relations etc. through a PESTLE
Analysis. The major issues identified through this analysis are outlined in the
following chapter. These issues are mainly the ones proposes by the writer for
Japan to focus on.

The third and final chapter of
this report briefly outlines all the major steps that Japan can take to address
the issues outlined in the previous chapter of the report. One issue called for
multiple steps to resolve. The proposed steps
mainly give the idea of different ways to increase the overall long-term
sustainability of the fiscal policies, to stabilise the issue with toughening
wage conditions and to rebalance the employee-vacancy ratio, and to propel the
economic growth to a more visible inflationary route.

 

 

 

 

                                                                                    

Table of Contents

Executive Summary. A
Introduction. 1
1.      Japan and its
Economic Evolution. 1
1.1.       Japan’s Economic
Profile Post World War II 1
1.2.       Japan in the
Global Economy. 3
1.2.1.     ‘Abenomics’ & Japan. 3
2.       Key Issues for
Japan to Prioritise. 5
2.1.       Japan’s PESTLE
Analysis. 5
2.2.       Three Key Issues
to Focus on. 6
3.       Steps to take for
Japan. 8
Conclusion. 8
Reference. i
 

 

 

 

Introduction

Japan, a sovereign island nation in East Asia, wakes up
every day with the thoughts of being challenged by the nature and being shaken
by the mighty earthquakes (42 major quakes between 1945- 2017) yet had
surprised the world with its economic growth in the 1980s. Japan became second
among the world economies following its robust economic growth which started in
late 1960s (Hill, 2016). It was foreseen
that Japan would become the largest economy within 2010.

Japan  
  Capital: Tokyo

Population: 126.4 mil

Area: 377,864 square  km

Language: Japanese

Religions: Shintoism,
Buddhism

Life Expectancy: Men – 81 yrs.
, Women-87 yrs.

Currency: Yen

Table 1 Japan Profile

(BBC Monitoring, 2017)

All of its major leading economic indicators and lagging economic
indicators, like the stock market, manufacturing activities, housing, retail
businesses, GDP, income and unemployment levels, inflation, trade balance etc.
changed noticeably throughout the years after the World War II (BBC News Services, 2017).

1.     
Japan and its Economic Evolution

Japan’s economy after the World War II faced numerous problems due to
the war devastations and its defeat. It was in such a bad shape that was dubbed
as ‘less-developed country’ in 1952 (Jansen, 2000). Working systematically with its
economy, Japan transformed itself to a ‘developed’ country directly from a
‘less-developed’ one, and it was the first such country to be able to do so (Buruma, 2003). 

1.1.          
Japan’s Economic Profile Post World War II

Among the numerous economic difficulties, few stood out; unemployment,
energy and food shortages, and inflation are few such difficulties. The
unemployment problem came in the form of underpaid people employed in the
massive agricultural projects going on throughout Japan. Although technically
these agricultural projects absorbed more than the 13 million people left
without jobs after the military was disbanded, this problem of underpaid jobs
would persist in Japan long after the WW II. The problem of energy and food
shortages ensued as well. The energy supply of Japan then depended on coal and
as such the shortage naturally came after its defeat in WW II. Again the food
supply, mainly the rice supply, suffered from shortages too in between 1945 and
1946. On top of all these, inflation came in the form of the large amount of provisions
for the military expenses which came in during and after the wars. These mainly
included the payments of the disbanded troops, loss

compensations,
payments for the troop goods etc. (Takada, 1999).

Figure 1 Tax Decreases by Preferential Measures (1950s-70s)
(Shinji Yoshioka, 2016)

The economy after the war advanced on the broken industrial structure
left from the widespread destruction. 
The journey from a ‘less-developed’ country to a ‘developed’ one after
the World War II became successful because of some nationwide phenomena, like
high percentage of personal savings and noticeable private sector investments
as shown in Figure 1, robust work
ethic of the workforce, abundant supply of low-cost oil, selective government
intervention in the private sector industries, and not to mention the
innovative technology. Figure 1 explains few
of these major factors; it demonstrates how savings has been promoted through
tax breaks since the mid-60s, while promoting investments in enterprises and
industries started from the early 60s (Shinji Yoshioka, 2016). Japan was one of
the main beneficiaries of the idea of free trade economy professed in
International Monetary Fund; within 1968, the country’s economy emerged as the
second largest one. It remained in this position throughout the 70s, 80s, 90s,
2000s, until China surpassed it in 2010. Japan’s status changed to a donor
country in the late 60s and has since been providing aid to different
developing countries (Gordon, 2003).

1.2.          
Japan in the Global Economy

1.2.1.  
 ‘Abenomics’ & Japan

To come to the modern
Japan’s economy, it has grown out to be a highly export-driven one. However,
the economy has suffered the downside of a mostly export-dependent economy; its GDP fell into a decreasing trend from 1997 and this
dragged the economy to a deflation till 2012 as shown in Figure 2. While Japan fought deflation for about a decade,
Shinzo Abe came in the ground as the Prime Minister of Japan in 2012 election
and thus began the journey of ‘Abenomics’ and Japan’s long-term recovery path.
The special term was given to the collection of monetary, fiscal and economic
reform measures Shinzo Abe proposed and implemented subsequent to his assumption
of office in late 2012. This was also the year Japan’s economy demoted to the
third largest one from the second largest status. These reforms implemented
certainly spiked up the overall economic condition and these continue to have
impact on the continued expansion and growth of Japanese economy (Cabinet
Office, Japan Macro Advisors, 2017).

Figure 2 Real GDP Growth YoY %

(Cabinet Office, Japan Macro Advisors, 2017)

Till
2016, about 61% of Japan’s GDP was contributed by private consumption, about
21% by government consumption and only about 15% and 17% by exports and imports
respectively Table 2.

 

Items in Year on Year
(YoY) %

 

GDP

Private Consumption

Private Capital Expenditure

Government Consumption

Exports

Imports

2013

2.7

2.4

7.5

1.3

6.2

9.2

2014

-0.4

-1.8

2.3

0.3

12.6

4.7

2015

1.1

0.2

3.3

2.1

-0.4

0.7

2016

1.5

0.6

1.7

0.2

4.8

-1.6

2017 / Q3

2.1

0.9

3.8

0.2

6.4

2.4

Table 2 Real GDP of Japan & the
Components (YoY%)

(Cabinet
Office, Japan Macro Advisors, 2017)

As the situation in
the third quarter of the Financial Year 2017 stood, its economy continued to
grow very moderately, where the trend of moderate rise on exports continued,
corporate fixed investments kept on increasing (as the profits of corporations
are on the rise moderately), and although the public investment increased, the
housing investments hardly improved. However overall, Japan experienced this
moderate growth for the seventh quarter at a row (Trade Economics, Cabinet Office – Japan, 2017).

 

 

 

 

 

 

 

 

 

 

2.      Key
Issues for Japan to Prioritise

2.1.          
Japan’s PESTLE Analysis

Before diving into the national
and impactful international issue which Japan needs to prioritise in its
national and foreign policies, a macro-analysis is provided through PESTLE Analysis
of Japan as a country:

Politically Japan is a monarchy with multiparty
parliamentary democratic system. Here, the monarch acts as a ceremonial leader,
and the Prime Minister is the head of government and the state. Currently Japan
has five political parties, namely Liberal Democratic Party, Democratic Party
of Japan, the People’s New Party, the Social Democratic Party, and the New
Clean Government Party. 

Japan is a United Nation’s member
country and one of the countries from the G8. As an economic entity, Japan is a
member of ASEAN (Association of South East Asian Nations) and APEC (Asia
Pacific Economic Cooperation).Japan has international disputes over energy,
marine resources, land etc. with countries like Russia, South Korea, Taiwan,
and China (Frue, 2016).

Economically Though Japan has the potential
to be the strongest economy is the world, few economic and international
indicators dragged it behind China and the USA. The country is going through a
deflationary trend, although inflation is picking up, but rather slowly.
Unemployment reached its lowest since 1993 in 2017 (Q3), to a 2.7%, but wages
and as such household spending is still low – although the household spending rose(1.7%)
above the expected value(0.5%). This rising household spending is however
expected to get a blow again as the prices of fresh food and possibly oil are
expected to rise by 2018 (Nohara, 2017).

With more than 127 million
Japanese residents, socially
Japan emphasizes a collective culture. Social inter-dependence is
emphasized even in modern Japan (U.S. Library of Congress, 2017). Japanese women are
expected to contribute to earnings, unsurprisingly birth rates have been
particularly low for few years since 2014 (IMF Country Report, 2017).

Technologically Japan is one of the most advanced in the world, especially in terms of
telecommunications. Japan leads the world in research and development,
particularly in biomedical works, electronics, machinery, robotics, automobiles
etc. Japan also uses the most robotic technologies in manufacturing plants and
other industrial and/ research projects (Tokyo Times, 2016).

Legal System in Japan is independent
and fair; overall score of Japan’s Judicial Effectiveness is 73.8, which is
considered to be of a fair system. The system also is apparently fair in terms
of protecting property right. Only because of the close network in certain related
industries, corruption can occur when it comes to Government project tenders (The Heritage
Foundation, 2017).

Much like other industrially urbanised countries, Japan faces
challenges in terms of environmental issues. Waste Management has been a major issue for the country. Once,
the country’s efforts to dispose of industrial wastes made its air pollution
problem more visible. Among the disastrous events, the Fukushima nuclear
incident which resulted in deadly environmental pollution comes to fore.
However, Japan is one of the few countries which aggressively implements clean
technology measures (Clark, 2017).

2.2.          
Three Key Issues to Focus on

The
first issue for Japan to focus on is the imbalance of employable population to the employments
available (with a still
tighter wage streak). The country’s unemployment has been historically low, but
the ratio of position openings to prospects is 1.49, which indicates a labor
shortage. This phenomenon has been widely attributed to a combination of a
decreasing employable population (at a rate of about 700,000 people a year) and
low rate of wage increases by the employers because of the prolonged period low
inflation. The habit of workers of staying with the same employer for their
lifetime can be another reason (Kalish, 2017). This issue is resulting in
overall low household wage gains and as such the private consumption decreased
about 0.5% (Nohara, 2017).

An ever increasing government debt, mainly domestically held debt, is the second issue that Japan needs
to work on to be on a better track of national growth and international
competition. The government debt to GDP ratio has crossed 220% recently, which
is alarmingly high for the country (Organisation for Economic Co-operation and Development (OECD), 2017). In 2016, this debt
was 15 times the tax revenue. Deflation has plagued Japan, as mentioned in the
previous chapter, subsequently Abenomics got implemented. Central Bank of Japan
reduced the debt of government by reducing interest rate and purchasing
government bonds, supplying the financial system with more cash to induce
inflation. However, it has been predicted by multiple world class analyst
organisations and financial bodies that if everything remains constant, Japan’s
debt repayments will exceed its tax income within 2041; this prediction assumes
that the interest rate stays around 1.1%, however if the rate increases,
government has to default earlier (Pham, 2017).

The third most important issues Japan needs to focus on is conservatism towards International
Trade deals, especially bilateral ones. As a
part of the deregulation, Japan was expectant on the Trans-Pacific Partnership
(TPP) to ease up the international free trades, but hope was abandoned when the
USA pulled out of the agreement. For Japan to function better in the world
economy, it has to participate, and lead in more bilateral trade agreements, as
export oriented countries like China and Germany may start aggressive
devaluation to gain more export market share, which will eventually weaken
Japan’s already weakened currency (James McBride, 2017).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.     
Steps to take for Japan

Steps for reflating the economy
of Japan, establishing its economy in a state of a faster growth trend,
constructing and implementing policies to influence private spending while
aging populace is increasing and achieving an overall sustainable fiscal are
important. Few such possible steps are outlined below:

 Although a rise in total income of Japan’s
population may not directly result into increased consumption and increased
households expenses, even a 1% increase in total income within 2018 may result in the expected
reflation of the Japanese economy (Nohara, 2017). Increasing the participation of women in the employment
sector through incentives, not by negative reinforcements
like the currently used withdrawal of spouse tax benefits, is also important to
encourage faster economic recovery. Moreover, a more dense inflow of immigrants along
paired with more national investments (by relaxation of regulations against
competitiveness in similar industries) in the market will help to push the
inflation up and boost the economy faster (Kalish, 2017). 

A reform in the fiscal policy
needs to be done to reduce the debt-GDP ratio to maintain the building trust on
Japan’s Fiscal sustainability. Maintaining this trust is absolutely important to
keep its financial sector afloat and the real economy thriving; otherwise, the
world economy may experience a negative ripple effect. (Organisation for
Economic Co-operation and Development (OECD), 2017).

Trade protectionism has been a
key characteristic of Japanese foreign trade policy. However, steps need to be
taken to stabilise
Yen’s devaluation and still maintain the export growth rate currently achieved
through trade liberalisation. This can be achieved in part by initiating bilateral free-
trade deals with other Asian giants like China.

Conclusion

Japan
will eventually be able to overcome the slower growth of its economy and a
almost non-existent liberal trade deals through following the Abenomics
currently implemented, if only no major shock like the explosion of debt-GDP
ratio occurs; this may happen due to widening gap between its nominal interest
rate and the nominal GDP rate. Otherwise, the speculations of an impending doom
on the overall Japanese economy will most likely be blown out (Wakatabe,
2017).

Reference

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BBC News
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Hill, C.W.,
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