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Japan's Economy.

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Japan's Economy Over the past twelve years, Japan has experience the good and the bad of its economic cycle. The GDP was at its highest and balance of payments was at an overwhelming surplus during the late 1980's, strongly competing with the American economy. More recently, towards the end of the 1990's, the economic climate has experienced a complete alternation in performance in different aspects. The Gross Domestic Product (GDP) is the value of the total output actually produced in the whole economy over some period, usually a year. Graph 1 below shows the varied performance for Japan Graph 1 According to economic theories, in the long run, all economies experience an overall growth. The Japanese economy has complied with this theory but has also experienced deflation. The bullish growth during the 1980's was mainly led by consumer demand and exports of high technology products. The weak yen to the dollar (graph 2), due to the low interest rates in the mid-1980s (graph 3), considerably helped the growth. Thereafter the rise in interest rates and a stringent fiscal policy decreased inward capital investment and lowered consumer demand, which partly helped to shrink GDP in the early 1990s. ...read more.


The low ratio during the early 1980s again helps to explain why growth (in the form of exports) was high, the rising value of the yen from 1990 onwards can help to explain why the rate of growth of GDP was low (illustrated in graph 4). The massive drop in exchange rate in 1998 triggered huge foreign investment into Japan. As the aggregate demand rose in terms of investment, demand for the yen also rose drastically which resulted in the yen to soar. The high yen threatened exports, which negatively affect the growth rate of GDP. All that was left for the BoJ to do was to increases the supply of the yen in order to lower the exchange rate. This is because the interest rates were low enough. Graph 6 shows the line of best fit, which represents the potential GDP for Japan. We can see three main diversions from the line. From 1992 to 1995 there was a recessionnary gap (when production is below the potential due to inefficient use of resources) for the reasons explained above. There was growth but at very slow rates. The unemployed labour, due to the economic slowdown in early 1990s, was the "spare capacity" not used from 1992 - 1995. ...read more.


They hope to achieve this by developing particular cities by capitalising on their unique character for example directing funds into improving a harbour if that is the town's main feature. They also wish to reduce involvement in local governments issues. The final plan is dedicated to targeting resource allocation into areas of minimum opportunity cost and maximum gains. They aim to plan a budget to take into account more long-term views. The limitations of the policies are that they collide and contradict each another and that it will take time to implement them and then actually experience the outcome. However, they are very specific so its success can easily be measured. Along with the policies mentioned above, the fiscal and monetary policies can be used to keep Japan on track for economic reform. The interest rates should be kept low enough to derive a low exchange rate to push up Japanese export, and the money supply should increase to bring in steady inflation. The Government should play the central role in gathering funds to pay of international debts (through maintaining a steady taxation system) and they should also direct spending into other sectors in manufacturing (other than high technology equipment) to effectively compete with the other growing Asian nations. Although Japan has promising capabilities, the highly vulnerable Asian economy creates an uncertain short-term future. Economics Coursework Amit Sodha 1 ...read more.

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