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Japan’s Economy Stagflation and its revival strategy

Japan- world’s third biggest economy is in recession. The economy performance is well below the expectations laid out when Prime Minister Shinzo Abe took office in 2012. After taking office in December 2012, Abe declared plans to take the stagnating economy out of deflation. The three arrowed strategy (popularly known as Abenomics) includes fiscal expansion, monetary easing, and structural reform. Though the immediate goal was to boost domestic demand (by rising GDP), the long term goals were to improve country’s rating by becoming more competitive.

The Japanese economy has lately begun to show some signs of change as the large economic packages have slowly taking pace while helping in stopping the economic downturn. But despite the slight development seen, the demand from the private segment remains a constraint and is almost stagnant. Thus the possibility of economy going for a toss once again once the effect of economic packages phase out is very high. Following are the two fundamental problems for the economy:

  • Sharp decline in birth-rate along with aging of population
  • Adjustment of bubble burst of the economy still remains insufficient

Japan’s economy performance

japan 1

Source: World Bank

Several fears in the mind of people such as employment prospects, pension schemes and government deficit are restraining any turnaround in the economy. These fears are result of eroding sustainability in wage, employment and social security system. Lastly, the rising fiscal deficits are making people concerned about the possible tax hike in future along with interest rate.

 

Balance of trade remains a concern

japan2

Source: Ministry of Finance, Japan

Japan’s exchange rate and real interest rate

japan3

Source: Oanda.com, World Bank

In order to cope with these problems, a new system needs to be built in which production factors such as capital, labour, land and the likes should be allocated in a much more efficient manner. Also, full utilisation of these resources should be promoted. Further, a shift in paradigm from the old management style which depends on unrealised capital gains is required. The financial system based on land as collateral needs to be changed as the malfunctioning in existing system is resulting in rusting. It is important that the abundant savings of the economy are put to use for economic development.

Lastly, the households and enterprises have lost confidence in the government policies. Thus, it is necessary that confidence is rebuilt by prompt policy action. This can be achieved by strengthening safety in employment. A fundamental structural reform in both the public and private sectors is necessary which can be achieved with the help of strong political leadership.

Revival of the Japanese economy is indispensable as it is important not only for India or Asia but the entire global economy.

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