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The Study of Japan's Recessions and Booms: An Analysis of Japan's GDP for the Last 20 Years.

Extracts from this document...

Introduction

The Study of Japan's Recessions and Booms: An Analysis of Japan's GDP for the Last 20 Years By Dillon Casey: 110124534 Over the last twenty years, Japan has experienced the extremes of both sides of economic growth. Before and during the eighties, its economy had become the envy of world superpowers as its consumption-led nation experienced growth never before thought possible. Japan was a world leader in exporting, and in the eighties was at the forefront of technological innovation. It had experienced small recessions, but always bounced back stronger than ever. However, in the early 1990's, the seemingly invincible economy experienced a complete downturn as it fell catastrophically into a recession it has yet to escape. What fundamentally defines these booms and recessions is an important economic variable known as the gross domestic product (GDP). This paper will use basic economic theory, including IS-LM analysis along with some Growth Theory to determine the economic reasons for these fluctuations in the growth rate of Japan's real GDP from 1983 to 2002. The gross domestic product, or GDP, is the value of the total output actually produced in the whole economy over some period. Nominal GDP is the total dollar value of that output, while real GDP is the nominal GDP divided by the economy's price level, and will therefore equal the output that year. This paper will focus on the growth rate of the real GDP per year, or the percentage change of the real GDP in one year. Real GDP can also be stated as a country's national income, as it is in IS-LM analysis. From this point onwards, real GDP will simply be stated as GDP, and its percentage growth will sometimes be written as Japan's 'growth' or 'growth rate'. In all cases, when the empirical data is presented in a chart form, the growth rate of GDP is found on the left axis, while the growth rate of the other variable is found on the right. ...read more.

Middle

As a result, investment was boosted from a -9.1 percent growth in 1993 to a positive growth of 4.1 percent by the end of 1994. The policies contributed to the economic recovery and with the accompanying increase in consumption and net exports that year, Japan's GDP managed to climb out of negative growth to expand by 2.3 percent that year. The BOJ continued cutting interest rates to 0.5 percent in 1995 by loosening monetary policy and investment shot up 11.4 percent to help contribute to the boost of GDP to a local maximum growth of 3.6 percent in 1996. In 1997, "the government tightened its fiscal policy with a soaring tax rate to help pay its large debts from the previous years."7 The increases in taxes reduced consumption as disposable income fell, which caused the fall in GDP growth to 0.6 percent in 1997 to -1.0 percent in 1998, despite the enormous increase in government expenditures that year. Often policies take a while to kick in, and 'trickle down' to boost aggregate demand. This appears to be the case in 1999, as the increased government expenditures of 1998 seemed to be taking effect. Lenient monetary policies also continued to push down interest rates, stimulating domestic investment and consumption. By 2000, business investment had risen by 16.6 percent and private consumption was also on the rise. The yen also began to depreciate again, increasing net exports by 10 percent that year. All these factors helped raise GDP to a solid growth rate of 3 percent that year. Over the next two years, Japan's GDP dropped with falling investment, government spending and exports, and rose the next year accompanied with the same variables. By the end of 2002, Japan's GDP had grown slowly by 1.2 percent. IS-LM analysis of the determination of GDP in Japan seems to fare well in this time period however it does have its short comings. ...read more.

Conclusion

This may have been the cause of the fall in Japan's GDP growth in the early 1990's. The Solow model predicts that in steady state, countries with lower labour force growth rates and lower savings rates will have the same (zero) growth rate of output per worker, but a lower growth rate of output.18 The model suits the data quite well, as Japan's saving rate and labour force growth rate were both high in the 1980's, along with the growth rate of its GDP, and were both lower in the 1990's when Japan entered its recession. On the other hand, the theory does have its flaws. Perhaps its worst assumption when considering Japan's economy is that it is closed. Japan is highly dependent on both imports and exports of financial capital, raw materials, and finished products. Also, the extremely low interest rates have caused Japanese corporations to invest heavily in foreign countries to receive hopefully higher returns. This, along with the fall in saving rates has hindered Japan's ability to build up capital and therefore speed up growth. The presentation of the Solow model in this case has not adjusted for influences from outside economies and must do so in order to properly analyze growth in Japan. In general, the fluctuations in Japan's GDP were explained quite well by both growth theory and IS-LM analysis. The models however are too simplistic and need adjustments for the structural aspects of Japan (especially its susceptibility to influences of outside economies. This paper also failed to incorporate models of expectation such as the Friedman or Lucas supply rules which are just important as the IS-LM and Solow growth models in analyzing the output growth of an economy. They therefore must be examined for a proper study. Today, Japan is still feeling the effects of the collapse of what has come to be called as the "bubble economy" in 1991, and is still growing at a sluggish rate. ...read more.

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