Factors Ailing the Japanese Economy

Factors Ailing the Japanese Economy

The second largest developed economy in the world and the third overall has not been able to recover from its times of the lost decade.

Following the asset price bubble burst in the 1990s after the Bank of Japan eased monetary policy to sustain growth, Japan really could not catch up with the pace of the economic growth in economies world over. Individuals and businesses have been sceptical about consumption and have thus preferred to pay off debt rather than consume more and invest. The low growth in consumption spending and investments are one of the major reasons of concern for the Japanese economy.

The government to a certain extent increased its spending to revive growth but could do it to a limited extent due to huge government debt which currently stands at about 240% of the GDP of the country. This period of low consumption and investments led Japan into a state of deflation which led to a catastrophic fall in the future prospects and thus the investments in the economy.

The BoJ and the government allowed the currency to depreciate with respect to the dollar to boost export income and thereby lead to a current account surplus but attempts failed due to lower export volumes owing to the low business investments. The current target for the economy is to reach a stage of 2% real GDP growth with a moderate 2% inflation rate. The targets are slowly being reached but owing to the huge debt and the availability of easy money, the prospects of the economy are somehow shaky.

Abenomics

The term refers to the economic policies of the Japanese Prime Minister Shinzo Abe to revive the Japanese economy to a period of economic growth and stability. Abe followed a three pronged strategy for revival of monetary easing, timely and massive fiscal spending and now the economic reforms. The key to the solution lies in the careful analysis, recognition and addressing the fundamental issue: getting households and businesses to borrow.

Monetary Easing was carried out to promote investments and it has produced results: 80% surge in the markets and 20% of drop in Yen prices compared to the Dollar but the growth seems to have been driven by foreign investments rather than domestic consumption and investments. However it has been able to garner positive sentiments in the economy which may be the right solution for the ailing economy. Moreover, monetary policy cannot succeed unless people are ready to spend, i.e monetary easing cannot