Japan Increases Export Despite Downturn

Another factor that may have affected consumption of domestic goods and services is that the Japanese consumers have adopted “a stark frugality during the years of economic stagnation” and it is “darkening the prospects of many companies”. As people expect economic conditions to worsen under the effects of the global recession and also experiencing unemployment rate rising up, they are likely to reduce their consumption today in order to save for the future. Therefore, shifting the aggregate demand curve from AD to AD2, seen in Fig.2. When people start to save more money than they spend, it reduces the amount of money flowing in the economy and eventually leads to a decrease in the national income from Y1 to Y2.

Additionally, as there are high levels of unused factors of production such as unemployed labors, it would lower the potential output of the economy from Y to Y2 as demonstrated on the Keynesian LRAS3 curve. Even though the government is still trying to stimulate demand in the long run by using intervention methods such as economic packages, but it is to no effect when “household spending has continued to decline”.

A combination of all of these factors will put Japan into the position of the trough phase of its typical business cycle. There is a negative output gap, “deflationary gap”, where the economy is producing below its potential output. This is due to the unemployment issue that Japan faces and how the Japanese companies are lowering supply in the domestic market when they “just don’t see a future in the  domestic market”.

As a result of the overall decline in domestic consumption, local Japanese firms are all not very confident about the future of the economy. Therefore their business confidence in the domestic market is lowered. Hence, they are not putting in any more investment to increase potential output and productivity. The local Japanese firms are lacking incentives to invest in new plant and equipment because domestic demand is falling. Therefore, shifting the aggregate demand curve from AD to AD2, seen in Fig.3. Instead, local Japanese firms now choose to concentrate on foreign market by increasing their share of sales in the foreign market and putting more investment into making products specifically for emerging foreign markets. For example, Panasonic “is making products specifically for emerging markets like China and Vietnam” and has also “introduced a line of household appliances in Europe”. As we can see on Fig.3, domestic companies “are tying themselves more tightly to overseas markets and innovation”, which could bring down the supply-side incentives for the domestic market. This dilemma will cause aggregate supply of Japan to shift inward from AS to AS2, because there is a lack of incentives provided to the labor by the companies, therefore forming a new equilibrium level of national output at PL1Y2.

In conclusion, the Japanese’s economy is failing even “as the government pumps money into the economy”; this shows that the stimulus packages are not effective enough to pull Japan out of the trough phase given the high unemployment and the worsened expectations of the consumers. Additionally, since companies are investing into foreign markets, the aggregate supply in Japan is lowered.