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The rise and relative decline of the Japanese economy.

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Introduction

INTRODUCTION The rise and relative decline of the Japanese economy has been an important feature of the world economy over the last decade. The Government-industry cooperation, a strong work ethic, the mastery of high technology, and a comparatively small defence allocation (1% of GDP) have helped Japan advance with extraordinary rapidity to the rank of second most technologically powerful economy in the world after the US and third largest economy in the world after the US and China. One notable characteristic of the economy is the working together of manufacturers, suppliers, and distributors in closely-knit groups called keiretsu. A second basic feature has been the guarantee of lifetime employment for a substantial portion of the urban labour force. Both features are now eroding. Industry, the most important sector of the economy, is heavily dependent on imported raw materials and fuels. The much smaller agricultural sector is highly subsidized and protected, with crop yields among the highest in the world. For three decades overall real economic growth had been spectacular: a 10% average in the 1960s, a 5% average in the 1970s, and a 4% average in the 1980s. Growth slowed markedly in the 1990s largely because of the after effects of over investment during the late 1980s and contractionary domestic policies intended to wring speculative excesses from the stock and real estate markets. ...read more.

Middle

In short, the "Keynes effect" will be disabled. To achieve the economic stability, Japan must do the daring internal restructuring through deregulation and administration reform that is stronger than ever to solve the problem. The real solution is to free up the economy, liquidate the malinvestments and cut taxes further. Also Japan in effect needs inflation, because it needs a negative real interest rate. Keynes argued that interest rate was determined by liquidity preference and the supply of money. But the liquidity trap clearly assumes that the demand to hold money is determined by the rate of interest, meaning that this demand should vary inversely with changes in the rate of interest. In the 1990s, macroeconomic policy options were exercised to deal with the economic bubble burst in 1991. In 1995-96, monetary policy was loosened, and a variety of two-year tax breaks was given. Subsequently, the growth rate reached 3.9% in 1996. The strength of this comeback was overestimated. In 1997, fiscal tightening (April consumption tax increase to 5%, and September increase in health care costs to the individual), which totalled about 2% of GDP, was intended to curb the growing government deficit. ...read more.

Conclusion

The best solution involves a mixture of monetary and fiscal stimulus. As Posen argues, an inflation target of approximately three percent per year combined with permanent income tax cuts will help stimulate aggregate demand and allow Japan's economy to grow again. APPENTIX REAL GDP INFLATION % INTEREST RATE % UNEMPLOYMENT % billions of Yen 1980 9.21 1980 7.79 1980 2.0 1980 290706.9 1981 4.80 1981 8.66 1981 2.2 1981 299737.7 1982 2.80 1982 8.02 1982 2.4 1982 308768.5 1983 1.93 1983 7.42 1983 2.6 1983 316079.2 1984 2.23 1984 6.80 1984 2.7 1984 328550.4 1985 1.96 1985 6.34 1985 2.6 1985 343171.7 1986 0.64 1986 4.60 1986 2.8 1986 353062.6 1987 0.11 1987 4.21 1987 2.8 1987 367684.0 1988 0.74 1988 4.27 1988 2.5 1988 390476.1 1989 2.21 1989 5.05 1989 2.3 1989 409397.8 1990 3.09 1990 7.36 1990 2.1 1990 430039.8 1991 3.30 1991 6.52 1991 2.1 1991 446381.3 1992 1.74 1992 4.94 1992 2.2 1992 451111.7 1993 1.24 1993 3.69 1993 2.5 1993 452401.8 1994 0.66 1994 3.71 1994 2.9 1994 455412.1 1995 -0.09 1995 2.53 1995 3.1 1995 461862.7 1996 0.19 1996 2.22 1996 3.4 1996 479924.4 1997 1.68 1997 1.69 1997 3.4 1997 484224.8 1998 0.62 1998 1.10 1998 4.1 1998 470033.5 1999 -0.29 1999 0 1999 4.7 1999 464012.9 2000 -0.70 2000 2000 4.9 2000 466163. ...read more.

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