Public policies and the japanese economy savings
3. Analyse the article chosen to identify linkage between the economic concepts you have learnt in class with the discussion of the macroeconomic event in the article. Apply the economic concepts and models learned to discuss the economic challenges faced by the economy concerned and to explain the rationale for the economic policy (ies) chosen by the government to overcome the challenges. You should use other related news articles, reports and academic journals to support your discussion as well.
6. The newspaper article will serve as the focus of your discussion. However, your discussion is not restricted to just the content of the article chosen. You are free to discuss on other relevant information (from other sources) which relate to the main macroeconomic event you have chosen. Do not rely on one source and do compare and contrast perspectives. For use of internet sources, you should note that there is no quality control over the information in the web. As far as possible, you should choose website established by authoritative institutions such as the World Bank or the respective countries’ government official websites. And avoid Wikipedia definitions!
One of the basic facts regarding the operation of an economy is the fact that any decisions made by the government impact different sectors of the economy differently. The central bank or the government with their policy cannot make conditions favourable for all the economic agents (Ishikawa, Wang, and Nakazawa, 2018). Therefore, the main challenge for the Bank of Japan is maintaining a balance so that each of the economic agents gains something from the policies contributing profoundly towards the national product of the country.
Figure 1: the changes in the Nikkei over the years
There is a number of causes of the problem which is there in the economy of Japan. First and the foremost source of the problem are the unchanged government policies that were used for the last 2 years. The interest rates were pegged at a certain value and hence the economy had no scope to expand. Apart from that the low-interest rates in the economy also led to a lack of investment in the economy (Wong and Loi, 2016). The lack of investment in the economy, in turn, created low aggregate demand that caused the problem. Another important cause of the problem is the inability of the central bank of Japan to understand the underlying problems of a pegged interest rate over the years. The needs of the corporate sectors and different industries of the market are also not incorporated in the decision making of the government and the central bank. Tsutsui and Mazzotta (2015) noted that contractionary policies of the government have been detrimental for the growth of the economy for a long period of time. These have failed in generating enough demand in the market.
A major cause of the problem is also the credit crunch that has resulted in the economy of Japan in the past 2 years due to a tight monetary policy. The main aim of the government and the central bank of the country were to keep the inflation level high so that the exchange value of the Japanese currency remains the same. Umeda and Kawamoto (2018) noted that one of the biggest reasons for that strategy is the fact Japan has a huge external debt. According to the figures of 2017, the external debt of the country stands at 3.24 Trillion USD which is a significant portion of the national GDP of Japan. Therefore, the major concern for the government was to maintain the same level of external debt that was only possible if the exchange rate of the country compared to the USD is pegged at the same value. The depreciation of the Japanese currency relative to the US dollar will increase the external debt of the country and hence the overall expenditure of the government would have increased. Qiu (2015) highlighted that, one of the best ways to keep the exchange rate of a country the same is the controlling the interest rate of the economy. The fixed interest rate would provide more stability in the capital market of the country leading to an increased demand for the Japanese currency (Otsu and Shibayama, 2018). This major objective or the goal of the government compelled the central bank and the government of Japan to have a strict and tight monetary policy that in turn reduced the aggregate demand in the economy of Japan.
The figure above clearly depicts the stagnant GDP growth rate of the economy over the past few years. Xing (2016) highlighted that the economy of Japan had a great potential due to the advancement in technology and the enhancement of other sectors. Japan also had the potential to become one of the largest destinations for the foreign investment, however, low interest in the economy and the lack of concentration of the government on the investment inflow impacted the overall economy of Japan.
Furthermore, one of the biggest impacts of the changes in the policy of the Bank of Japan and the actions of the government over the past few years is the dampened aggregated demand. The aggregate demand is an important macroeconomic measure that checks and determines the economic activity of the economy. The aggregate demand also predicts the overall GDP of the country as well (Krichene, Inoue and Fujiwara, 2017). The low-interest rate and hence the low inflation in the market created a type of recession in the economy of Japan. Although the government tried to keep maintain the aggregate demand in the market by increasing the expenditure each year since 2009, it failed in generating a healthy aggregate demand in the market. In terms of economics, the major change can be seen in the AD curve. In this case, the AD curve shifted to the left due to the imposition of the tight monetary policy and hence the price and the output remained low. The aggregate output and the overall price level of the economy are determined by the intersection of the AD and the AS curve of the market (Kim and Kwon, 2017). The supply side of the economy is not affected by the changes in the policies of the central bank of Japan in the short run. Therefore the price reduced and the real GDP reduced from the potential leading to a low GDP growth of the economy of Japan.
(Source: Hanagaki, Masahiro and Iwamoto, 2016)
Lastly, the government has stepped in with a further increase in government spending to help shift the AD curve to the right side. The government spending is another component of aggregate demand that is often used by the government to help boost economic activities in the economy (Hanagaki, Masahiro and Iwamoto, 2016). The expenditure of the government is spent on different sectors of the economy which further creates job opportunities helping the economy retrieve the position it had. The increased government spending is also a great strategy for boosting up the foreign investment within the economy of Japan. Apart from that the government spending can also improve the infrastructure of the economy of Japan that further can become a good platform for the investors. The government have also started working on the communication so that bank of Japan can set policies based on the current scenarios of the economic agents.
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