Economics (Japan)

Japan has the second most developed economy in the world; using nominal GDP, Japan’s economy ranks third in the world in size while it is the 4th largest when ranked using PPP. In 2013, it had a per capita GDP of $ 35899(Purchasing Power Parity). Japan, has higher than the EU region and only second to the US globally. Additionally, the incomes (GDP) of these two countries (Japan and the US) are comparable. In 2014, japan had a budget of $1.99 trillion while the US had $2.45 trillion. Although the public/government debt of japan was thrice that of the US, the economy has managed to keep its assets and capital productive meaning that its debt can be met effectively. This paper looks into the Japan’s economy, its trends, and its comparison to the US economy including the steps that have been taken to achieve and maintain competitive advantage. 

In 2014, japan exported $ 777billion and was the fourth largest exporter after the US, China and India. The US exported $1. 56trillion almost doubled japan but came second to China.  Japan’s GDP ranked fourth in the world and was $5.96 trillion while the US had a GDP of $15.68trillion. Japan’s industry especially manufacturing contributed more in percentage to the GDP (27.5%) than in the US (19.1%).  In the same year, the GDP per capita in the US was 37% more than in Japan. 


Since 1980s, Japan’s economy has experienced mixed growth. The period between 1980 and 1990 was characterized by an average GDP growth of 4%. However, there was a turn in the direction of economic development since May 1989. At this period, The Bank of Japan increased the interest rates above the economic potential of the country. This meant that the cost of credit rose above firm’s returns. At the same time banks gave credit to non-qualifying people which lead to mass defaults.  As a result, real estate and stock market collapsed.  This marked the beginning of deflation in japan which has never really been reversed to date.  Ever since, interest rates have been close to zero and the government has taken several fiscal policies to boost growth. The decade between 1990 and 2000 saw a reduced growth rate in which the economy expanded by between 1% and 2% except for 1998 and 1999 where it contracted by 2 and 0.2% percent respectively.  Since the turn of the 21st century, the Japanese economy is facing serious threats, a major one of which is aging population. Apart from this, 2011earthquake and Fukushima nuclear disaster followed by dangers of radiation led to a fall in GDP of around 1.3%. However it improved marginally in the following years. 

Japan produces more in its industry as a percentage of GDP. The main reason for this is its large experience as the government consolidated its industrial strategies in postwar period. Currently, the country ranks third in vehicle manufacturing globally.  It is also the largest producer of electronic products worldwide. In terms of patent registration, it ranks among the top countries globally in new patents. However, its industry is facing increased competition from China and South Korea which are coming of age technologically and western powers. To retain a competitive edge, the country is restructuring its industry to high value precision engineering, next generation hybrid vehicles and robotics.  

Due specialization in industry and creation of a competitive advantage; for instance, for the October 2015, the country had a surplus balance of trade of JPY111.5 billion. The country has had a favorable balance of trade that has averaged JPY 372.07 billion per month since 1963. The highest was JPY 1608.67billion for September 2007.  Due to this favorable balance of trade, Japan is the largest creditor nation in the world. By 2010, it possessed nearly 14% of all private financial assets in the world estimated at $14.6billion. 

Japan has very few natural resources; it imports raw materials, process them for local consumption and export. The country has very small land mass and large population; however, it is a collection of islands making it to have large ocean resources at its disposal, which has led to development of fishing industry. The countries real resource is its human resource. The Japanese competitive advantage rests it its ability to reinvent and realign its firms to the next generation technologies. For instances, the Japanese electronics and vehicle maker has made the most progressive robot in the world, capable of bipedal movement in busy streets without colliding with people. Still, its automakers including Toyota are leading innovations in green hydrogen driven vehicles and hybrids.  The great competitive advantage possessed by this economy is the versatility of economic players and occupational mobility of its capital. 

Japanese education is very responsive and focuses on the utilization of machines to achieve high outputs. Specialization begins early in Japanese schools as it is in the US.  Based on Japanese education and work philosophy culture named Kaizen, Japanese try to continuously do things in in better way. This coupled with development of better capital equipment and supportive government policies make the country’s exports competitively priced in the global market.  High technology and mechanization increases the output per person and hence the productivity of labor. 

Japan responded to 1989’s credit crunch in a manner that had never been seen before.  The government began large scale capital infusions for financial firms. As a result, the burst in the asset and stock bubble did not result into a full blown economic crisis as was the US credit crunch of 2007/2008.  Instead, the financial institutions and large firms remained just afloat but unprofitable for close to 7years when a real financial crisis occurred. Banks postponed the declaration of losses to form what was described as zombie banks.  The whole situation maintained the whole economy in what Paul Krugman described as liquidity trap for close to eight years. This wasan eight year postponement of a financial crisis, which also postponed recovery as real economic recovery begun after the financial crises. This is given as the reason for Japanese economic stagnation of two decades.   After the economy begun to recover in the late 2000s, earthquakes and Fukushima nuclear disasters adversely affected the effective recovery of the economy as they reduced economic productivity.  After a strong economic growth in GDP seen in 2010, the disasters described above lead to a GDP contraction of -0.5 in 2011. This improved to 1.7% in 2012 before slowing to 1.6% in 2013. In 2014 the economy grew by -0.1%. However, the ministry for planning projects a GDP growth of 1.9% in 2015. The growth in three quarters so far has been around 4.5% as compared to last year but Q4 of 2015 is expected to be characterized by a decline. 

Japan’s economic stagnation is caused by reasons such as aging population which reduces the output of labor and innovation, lack of natural resources and natural disasters. Improving capital availability through domestic borrowing can be very important for Japan’s economic growth. On the other hand, japans innovative and industrious culture that fosters continuous development holds the key for future economic growth of the economy. 

Japan’s government has come up with economic plans that have loosely been referred to as Abenomics which are being implemented by the current Prime Minister, Shinzo Abe.  The government aims to use fiscal stimulus, structural reforms and financial easing to counter the deflation that has held this economy since 1980s. With the shifting of japan to a net saving economy, deflation has been inevitable through reduced local consumption. The long-term effects of the government’s strategies remain to be seen. The government has been trying several strategies to raise inflation, some of which include a 3% raise in minimum wage.  The projected expansion of GDP by 1.9% for 2015 is encouraging for locals and investors. Additionally, the first three quarters of 2015 have exceeded their projected growth. It remains to be seen what the growth for the Q4 2015 and 2016 will be. 

Japan has a functional government bureaucracy that works to ensure there is free trade, fair competition and reduced corruption: the risk of doing business is low, the Penal Code and Unfair Competition Prevention Act guarantees this. Additionally, the amount that can be received as gifts is limited by the Ethics Act, government and firms’ officials are required to declare these gifts. The country has ratified United Nations Convention against Corruption. 

Since 2010, the Japanese government has made the largest investment as a percent of GDP adjusted for PPP in research and development in a single year.  In 2011, Japanese government spent 3.67% of its total GDP on research and development.  This amounted to $160 billion. Over the same period, the China’s greatest investment in one year was 2.08% of the GDP while the US spent 2.7%. Although the US may seem to spend more, japan spends a higher percentage of its GDP, a trend that has been maintained for many years.  Since 1980, japan established a Science and Technology Agencyin the office of the Prime Minister to fund and coordinate research. 1986 was the year in which japan begun to use a bigger percentage of its GNP in research and development than the US. In 1989, japan employed 700,000 people in research. In 2013, 473,259 Japanese applied for patents, the third highest number globally; out of this, 340,364 were granted which made japan to have the highest granted patents for the year. The government protects local and international patents.  To fund the current and future research programs, the office of the prime minister and other agencies fund research organizations, institutions of higher learning and private individuals including private firms to come up with current and future innovations. The main aim is usually to maintain a competitive advantage especially in manufacturing industry. The government only regulates fiscal policies, formulate business polices and is not engaged in production. It only create enabling business environment for firms through development of infrastructure.

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