The Economy of Japan

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Five yen coin
n the years following World War II, government-industry cooperation, a strong work ethic, mastery of high technology, and a comparatively small defense allocation (1% of GDP) helped Japan develop a technologically advanced economy. Two notable characteristics of the post-war economy were the close interlocking structures of manufacturers, suppliers, and distributors, known as keiretsu, and the guarantee of lifetime employment for a substantial portion of the urban labor force. Both features are now eroding under the dual pressures of global competition and domestic demographic change.

Japan's industrial sector is heavily dependent on imported raw materials and fuels. A tiny agricultural sector is highly subsidised and protected, with crop yields among the highest in the world. Usually self sufficient in rice, Japan imports about 60% of its food on a caloric basis. Japan maintains one of the world's largest fishing fleets and accounts for nearly 15% of the global catch. For three decades, overall real economic growth had been spectacular - a 10% average in the 1960s, a 5% average in the 1970s, and a 4% average in the 1980s. Growth slowed markedly in the 1990s, averaging just 1.7%, largely because of the after effects of inefficient investment and an asset price bubble in the late 1980s that required a protracted period of time for firms to reduce excess debt, capital, and labor.

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Japan economic downturn
n the second half of the 1980s, rising stock and real estate prices caused the Japanese economy to overheat in what was later to be known as the Japanese asset price bubble caused by the policy of low interest rate by Bank of Japan. The economic bubble came to an abrupt end as the Tokyo Stock Exchange crashed in 1990–92 and real estate prices peaked in 1991. Growth in Japan throughout the 1990s at 1.5% was slower than growth in other major developed economies, giving rise to the term Lost Decade.

Japanese lady hurting because of tsunami
A 9.0-magnitude earthquake and an ensuing tsunami devastated the northeast coast of Honshu Island on 11 March 2011, washing away buildings and infrastructure as much as 6 miles inland, killing thousands, severely damaging several nuclear power plants, displacing and leaving homeless more than 320,000 people, and leaving a million households without running water. Radiation leaks at the Fukushima Daiichai nuclear power plant prompted mass evacuations and the declaration of a no-fly zone - initially for people and planes within 12.5 miles of the plant but later expanded to 19 miles. In order to stabilise financial markets and retard appreciation of the yen, the Bank of Japan injected more than $325 billion in yen into the economy.

Japan enjoyed an uptick in growth since 2013, supported by Prime Minister Shinzo ABE’s “Three Arrows” economic revitalization agenda - dubbed “Abenomics” - of monetary easing, “flexible” fiscal policy, and structural reform. Led by the Bank of Japan’s aggressive monetary easing, Japan is making modest progress in ending deflation, but demographic decline – a low birthrate and an aging, shrinking population – poses a major long-term challenge for the economy. The government currently faces the quandary of balancing its efforts to stimulate growth and institute economic reforms with the need to address its sizable public debt, which stands at 235% of GDP. To help raise government revenue, Japan adopted legislation in 2012 to gradually raise the consumption tax rate. However, the first such increase, in April 2014, led to a sharp contraction, so Prime Minister ABE has twice postponed the next increase, which is now scheduled for October 2019. Structural reforms to unlock productivity are seen as central to strengthening the economy in the long-run.

Scarce in critical natural resources, Japan has long been dependent on imported energy and raw materials. After the complete shutdown of Japan’s nuclear reactors following the earthquake and tsunami disaster in 2011, Japan's industrial sector has become even more dependent than before on imported fossil fuels. However, ABE’s government is seeking to restart nuclear power plants that meet strict new safety standards and is emphasizing nuclear energy’s importance as a base-load electricity source. In August 2015, Japan successfully restarted one nuclear reactor at the Sendai Nuclear Power Plant in Kagoshima prefecture, and several other reactors around the country have since resumed operations; however, opposition from local governments has delayed several more restarts that remain pending. Reforms of the electricity and gas sectors, including full liberalization of Japan’s energy market in April 2016 and gas market in April 2017, constitute an important part of Prime Minister Abe’s economic program.

Under the Abe Administration, Japan’s government sought to open the country’s economy to greater foreign competition and create new export opportunities for Japanese businesses, including by joining 11 trading partners in the Trans-Pacific Partnership (TPP). Japan became the first country to ratify the TPP in December 2016, but the United States signaled its withdrawal from the agreement in January 2017. In November 2017 the remaining 11 countries agreed on the core elements of a modified agreement, which they renamed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Japan also reached agreement with the European Union on an Economic Partnership Agreement in July 2017, and is likely seek to ratify both agreements in the Diet this year.

Partly from the CIA Fact-book, 2018

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