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Introduction To The Japanese Economy Economics Essay

Part 1

Japan was the third largest national economy in the world which is later than the United States and People’s Republic of China which are the second largest economy expand. There is a population around 100million in Japan and with a 65 million of labor force during the year 2010. Era of population and a downbeat of population growth rate were the obstacles that Japanese Government faces today. This is the largest confront for Japan when the population in Japan in the older age above 65 years old is around 23% and at the same time. Due to this reason, Japan has the lowest productivity in the world.

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Japan is also dominant in nation’s industrial. In the year between 1955 and 1973, Japan has the real gross national product (GNP) expansion rank at the extraordinary standard rate of above 10 percent in a year which is twice higher than United States. During the mid of year 1970, global recession made a diminish abruption in economic development and a most unpleasant world war turned up at the same time. Japan’s undergo a perpetual growth of GNP after that while the economy improved again at the end of 1970’s. Japan experienced of economic growth after world war formerly is from the accumulating corporation of an intellectual, organization, conscientious personnel, elevated stage of reserves and speculation, manufacturing expression severe help, and overseas dynamic deal. A strong and extensive, even implement unofficial throughout, supportive business arrangement also inspire Japan’s government in their feature of resolution.

Apart from above, Yen is the Japanese legal tender. Japan obtained various sources such as petroleum, nourishments, crops, element, yard gods, unprocessed supplies and many more from a range of countries in industrial region because Japan has the deficiency of native wealth. Nowadays, building assembly, dissemination, real estate, provisions, and transmission are Japan’s foremost trading. Cars, electronic gadget and some workstation processor are Japan’s major exportation cargo. China and the USA are the general significant deal associates. Whereas, a oversupply retain from the import equilibrium in Japan. Japan largely trade in supplies are those unprocessed recourses for example fuels, crop and timber. USA, Australia, Saudia Arabia, South Korea, Indonesia are the exporter to Japan.

Japan has used up barely on resistance is the facts from the time of World War II . Labour forces individually around 1% in Japan’s GDP. Japan got watch over from outlandish attackers as from the United States, which consent to Japan in order to expend billion in dollars at occurrence erstwhile than defensive. Practically 100% of proficiency had given to instruct those labour forces. A brawny employment is a way of life give emphasis as well. Japanese employees are extraordinary dynamic and empower wealth intelligently. Associate with those western countries, Japan’s taxes are in ground level. Japan’s monetary has effectively contributed.

Part 2

Theoretical Background

The definition of monetary policy

Monetary policy is the monetary authority of a country to control the money supply as well as the regulation of interest rates. Central bank is the main responsible units to control the money supply when the country’s economy has problem. Each country has been face the economic issues, thus monetary policy is needed to them.

The aim and objective of monetary policy

The objective of monetary policy is principal purpose of the Euro system and the single monetary policy to keep the price stability. It is responsible for each country to help themselves because monetary policy can bring the more advantages to them. In summary, each country plan to aim at growth, stability and social justice. The objective of monetary policy has more important to attract people to accept, such as rapid economic growth, price stability, exchange rate stability, balance of payments (BOP) equilibrium, full employment, neutrality of money and equal income distribution.

The tools of monetary policy

The four main types of monetary policies are bank reserve requirement, the discount rate, open market operation and the federal funds rate.

1) Bank reserve requirement: Banks and other depository institutions are needed to hold amount of funds in reserve by the central bank for satisfying the customer withdrawals and outflows of money. If the central bank wants to reduce reserve requirements, they will extend the money supply to provide more money into financial market. Through the increasing reserve requirements can reduce the money supply to keep more money in bank reserve.

2) Discount rate: The discount rate is the Federal Reserve and another central bank charged rate of interest and borrowing reserves to banks and other depository institutions. Central banks want to increase the money supply and enhance the rate, they can lower the discount rate to reduce it. The Federal Reserve has three discount window programs such as primary credit, secondary credit, and seasonal credit to depository institutions.

3) Open market operation: It is an important type of monetary policy, open market operation includes the central bank sale or purchase government financial bonds. If the central bank wishes to increase the money supply, they will purchase government financial bonds and payment by bank’s reserves. When the central bank sells government financial bonds to another banks, it confirm the truth of reducing the money supply and banks’ supply of reserves.

4) Federal funds rate: The federal funds rate is the interest rate charged the banks and other depository institutions for short-term loans. When the economy appeared inflation, they will increase the federal fund rates to reduce the money supply. Otherwise, the Federal Reserve reduces the federal fund rates to increase the money supply.

The types of monetary policy

Monetary policy is generally referred to as either being an expansionary policy and a contractionary policy.

Expansionary monetary policy is monetary policy to increase the size of the money supply. The central bank will increase the money supply during a recession when unemployment is a problem. If the central bank needs to increase the money supply, they must buy the bonds, lower reserve requirements and the discount rate.

Contractionary monetary policy is monetary policy to decrease the size of the money supply. The central bank will decrease the money supply when inflation is the problem. If the central bank needs to decrease the money supply, they must sell their bonds, raise reserve requirements and the discount rate.


Part 3

Discussion and Argument

How was the monetary policy in Japan

The Bank of Japan was manifest exceedingly triumphant in organize a monetary policy in an attempt to stay away from inflation and harsh recurring instability than the majority of its equivalent in the Unites States and Europe upon the duration during 1975 until 1990. Within the premature year of 1990s, a downturn was bump into Japan. Conversely, it is rational to contemplate that possibly in attendance enhance the straggliest with customary intention in monetary and statistical which being fiscal moderated maintain. Japanese financial prudence is a exact statute in the management of monetary policy that boast formerly expansion and deliberation in the United States background.

In adept, the Bank of Japan (BOJ) in the vein of Federal Reserve has no means in use of monetary basis as an implement. Bank of Japan possess principally entrust on exploitation of short-range interest charge by the method of instigating rule as a substitution. Even now, the central Bank of Japan yearn for probable make sign as its keenness headed for develop incentive once more if hazard to it amplify of viewpoint later than a newborn Bank headship to remaining the marketplace lively. A wealthy citizen affirmed that monetary policies no focused at undervalue countries’ legal tender, this is intended to Japan which was truthfully meaning to lead a lower YEN.

Meanwhile, after the head of government in Japan’s indicate that there is no adjustment to the nation loose-fitting monetary policy, currency of Japan Yen descend to a 33-month beneath aligned with the dollar. The Yen was overwhelmed as Shinzo Abe believed in trading some bonds from overseas which it’s an preference for the central bank. In 1990s, economic bubble collapse and compose monetary policy in Japan retain turn into a main improve concern. Economist from United States enclosed a decreasing in Japan’s civic expenditure, particularly on transportation venture, and in order to cut down the budget insufficiency. Prime Minister in Japan impulse postal deposit by several banks in the global to extreme the largest deposit. As an alternative, this will facilitate a underpinning privileged banking segment.


The problem face by Japan in monetary policy is unemployment rate. After the World War II, Japan suffered the highest unemployment rate of 5.7% July, 2009, breaking the record of 5.5% unemployment rate in April the same year. Due to deflation and weak demand at home, the country fears that it cannot recover from this issue.

In 2009, it has increased 31% of people out of work to approximately 3.48 million compared to 2008. This causes jobless rate to rise from 5.2% May to 5.4% in June. This shows that only 43 out of every 100 job seekers will be hired.

Japan 2009, the world’s second biggest economy in the world, is now facing deflationary pressure. This causes core consumer prices, excluding food, dropped by a record of 1.7% from beginning of the year to June. Although exports and factory output may have upturns and suggest that the worst recession in Japan may have been over, but workers and families have yet to realize.

Average household income fell from last year to 3.2% in June. Despite the recession, spending rate rose slightly by 0.2% due to increase in daily expenses. About 70% of the drop in consumer cost was attributed to lower fuel cost, but excluding those, the cost of living still dropped by 0.7%.

Spending has been cut down due to fearing of losing job and decreasing wages for four months and this trend will continue to occur even if the lower fuel cost have been fully implemented.

Food and household items are facing price downfall which is affected by deflationary. Thus causing residents of Tokyo (the world’s most expensive city) leans towards cheaper goods, but it can bring a side-effect of over-cautious consumption, and decrease in production and wages.

A particular problem in Japan which is depression in consumers spending accounts for almost half of the economy. Depressed consumer spending is a particular problem in Japan, where it accounts for more than half of the economy.

An estimated of 6.07 million excess workers will be risking in losing their jobs unless a proper protocol of recovery in production. Around 290,000 labour workers on part-time or temporary contracts have lost, or are about to lose their jobs by September 2009.

The official figure ignores an estimated 6.07 million excess workers identified in a government report last week. Many of those workers will be at risk of losing their jobs unless production makes a sustained recovery soon.

In addition, a labour ministry survey published today said that as many as 290,000 workers on part-time or temporary contracts have lost, or are at risk of losing, their jobs by September.

Besides, the problem face by Japan in monetary policy is inflation. The increasing of oil and goods prices hit Japan’s economy with a one-two punch in May. The inflation is driving all the consumers to stiffen their wallet and aggressive to derail the country’s modestly growing economy. The core inflation in Japan excluding unstable fresh food price rose 1.5% in May from a year earlier, the quickest step since a consumption tax hike in March 1998 said by the Japan government.

The rising price of oil and goods are pushing up the costs which is damaging company profit and consumer response said by Economy Minister Hiroko Ota and need to continue to control the situation.

There is still got other numbers were a bit more upbeat which is industrial production in May rose 2.9% from the previous month as the manufactures increase output of mobile phones and cars and unemployment rate remained the level at 4%. In addition, retail sales also inched up 0.2% from a year earlier on higher fuel and food price and the Japan government said in a separate report.

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Until now, Japan had struggled with deflation or falling prices. But according to Friday’s data show that global factor are exerting upward pressure on essential living expenses such as fuel and non-fresh foods. Then, the prices of white bread were increase 12% from a year earlier. Spaghetti increase 32.2% and noodles jumped 20.7%. Gas line cost and kerosene prices increase which are 18% and 27.6%.

The consumer price index (CPI) data more emphasize the policy dilemma facing by Bank of Japan which is raising inflation coupled with a slowing economy. Those economists are predicting virtually zero growth or even a contraction on the world’s second largest economy in April until June quarter and over the months ahead.

As such, the central bank of Japan is likely to keeps its key interest rate at 0.5% for the moment that in face of inflationary pressures said UBS economist Akira Maekawa in a research report Friday.

The economist predicts that inflation in Japan is getting higher. Core Consumer Price Index (CPI) could be 2% later this year and may reach 2.5% by April 2009. Always purchase item can carry on inflation for concern. The possibilities that increase in inflation in Japan spur a wide recovery in domestic-demand. The inflation of energy prices contribute significantly. Stripping out food and energy, consumer price index (CPI) was decrease 0.1%, this is showing that Japan’s underlying inflation is stable.

However, Japan’s government downgraded its appraisal of manufacturing activity, as it called “flat” with a “few weakening factors”. Therefore, the projects production decrease 0.9% in June and increase 2.2% in July.

If there was a serious worsening in demand conditions that had been seen inventories pushing a quite a lot higher but there is nothing happening. So, it suggests that the exports are hitting a difficult moment and the industrial production is going to have an impact for that. It is going to be a combat for next six months, but it is not a special horrible development.

Deflation is one of the problem faces by Japan in monetary policy too. Deflation is the reduce of the price level in all goods and services. When the rate of inflation falls under 0%, the deflation will happen.

In 1990, deflation had started in Japan. The government and bank of Japan had tried to reduce the deflation by reducing the ‘quantitative easing’ and interest rate but it did not make the sustained increase in wide money and the deflation continue.

There are some reasons of deflation in Japan. First of all, the reason is tight monetary policy. The monetary policy of Japan which kept by the Japan’s Bank was not fixed when the inflation was under zero, tightening when deflation ends. Second is the unfavorable demographics. In Japan, there is 22.6% that is over 65 years old, will start a long decline too. Recently, the death rate of Japanese was greater than the birth rate of Japanese.

Thirdly is the prices of asset had fall. Deflation of prices on asset in Japan means a correction or reversion back to the level of price which overcome earlier than the asset bubble. In 1980, there was a slightly great cost bubble in equity especially the actual estate in Japan. Fourth is the insolvent bank. The bank which has a greater percentage of the loans are non-performing, which the bank does not receive the payment, and do not loan more money. In order to cover their bad loans, they have to increase the cash that they reserve.

Fifth is the insolvent company. The individual and company which lent by bank was invested in actual estate. When the values if actual estate dropped, the loans will not be pay. The banks will wait for the decision, so that it will improve the price of asset. However, there are some banks will make more lends to the company which they had, are use to service a debt. It will keep on be deflationary force until assets are sold off.

Besides, fear of insolvent bank is one of the reasons too. Japanese people prefer to purchase Treasury bonds rather than save their money in the bank account because they frightened that the banks will fall down. In this case, the economic will growth due to the money is unavailable for lending. It will causes the rate of saving will depresses consumption. However, it does not come into view in the economy.

Last but not least, the imported deflation is one of the reasons. Japan imports the consumable goods and raw materials at the low cost from Chinese and other countries. Therefore, the import products’ prices are reducing. Deflationary occurs due to the decrease of prices in the economy.


There are some solutions that government of Japan to solve the problem of deflation. First, the bank of Japan should communicate and build up a believable and comprehensive anti- deflationary strategy of monetary policy to the public. The measures of quantitative easing should be excluded.

Second, the bank of Japan should find out the purpose to assemble the target by highlighting the willingness to utilize, although the measures of unconventional is negative interest rate at the balances of banks if the quantitative easing does not work. Negative interest rate not only save the money at the bank of Japan but also cause the banks to lend out the money. Negative interest rate will also affect the outflows of capital and put downward force on the yen. The lower yen will increase the imports’ cost that will causes inflationary pressure.

Last but not least, monetary policy is the important role to overcome deflation. Japan has to regain the optimism and dynamism in order to overcome the pessimism which had been fallen in the society of Japanese.

Besides, there are some solutions that government of Japan to solve the problem of inflation. The recovery of Japan’s economy needed to take time. Economists and analysts said that the economy should have a touch of inflation in the country. The inflation of Japan is at an all time low. Right now, the economy is needed some amount of inflation to avoid into a deflationary problem. So, in Japan needs more inflation to solve the problem.

The central bank of Japan should set a inflation target for the country. It can be set at 0% to 2%; through this setting will affect the increase in demand. If the people know that price of product will be raised within in this few days, they will purchase goods before the day. Nowadays, Japan is facing liquidity trap although there is enough productivity but no demand and savings are more than investments. So, there is a solution has to work out that can solve the problem. Choose an efficient monetary policy. Then, to increase Japan inflation expects and for a longer term, the nominal rates of interest should be worked out. It can be around 12years until 15years. In modern times, the different economics do not print currency in crunch time. In contrast, most of economics increase their fiscal assets. May be the government has issued bonds. The commercial banks always takes care the transactions. But, if the process is applied in Japan, due to the capital ratio is insufficient along with horrible balance sheet of banks that is a reasonable to doubt the bank will loan the fund for the normal peoples even the people intend to loan money from the banks. So, this will not have much help to Japan’s economy.

One of the methods used by government of Japan to decrease the unemployment rate is sending immigrant workers back to their hometown. A lot of Latin Americans stay in Japan and work as foreign blue-collar workers. Government offers those Latin American residents some money and airfare to leave Japan with the requirement of their residency is revoked. When they leave Japan, there will be more employment opportunities for the citizens of Japan and it will helps reduce the unemployment rate in Japan.

In addition, government of Japan notices that agriculture could be another field to generate more jobs. So they decided to provide job-training programs in agriculture to some citizens. So those citizens could possess the skill needed to work as full-time farmers in order to earn money to sustain their life.

Part 4

Recommendation and Conclusion


Government of Japan should take some steps in order to control the inflation and unemployment that happened in their country. Normally the inflation of a country is indirectly caused by the action of their citizen. Due to the price of import goods is lower when compare to local goods, so more and more citizen choose to buy those foreign goods with lower price. Therefore, government should implement more tax on those foreign goods to make their price higher than local goods. Besides that, government also can set the price level for local goods. The seller should not sell the goods with the price that exceeds the price ceiling given by government. Automatically, citizen will buy back the local goods instead of continue buying foreign goods with higher price. When the demand of local goods becomes higher, it may decrease the cost of producing goods. So the local company could sell their goods with lower price and attract more consumers. When the demand of goods is higher, the company could increase their production line and they need more workers to work for them. This could help solving the unemployment problem in their country.

While there is deflation happen in the country, government should increase the money supply in the market to overcome it. Government could provide financial aid to some needy citizen. Hence, those citizens have chances to spend the money given by government to buy their desire goods. The Bank of Japan should buy back government bonds from the market to increase the money supply. Furthermore, the Bank of Japan has to decrease the interest rate. So more citizen will get loan from the bank and make more investments. This could help in stopping the deflation in the country.


As a conclusion, Japan monetary policy decisive is to create a winning reformation procedure and pleasant to the nation. It is more trouble-free to trade with the disturbance which set off during the reformation by expand the aggregate demand in expansionary monetary policy. This would build workers’ dynamic and become more generative from the deranged economy. Japan’s economy is getting well improved beyond the year of 2000s but the ration of inflation yet still illustrates a depression. However, it’s believed that Japan may maintain their marvellous potency in an exceeding skilled of labour force, people with enthusiastic and inspired engineers. Export segment in Japan is extremely vital which the greed in the world. Moreover, monetary policy is assumed that it could benefits in the reformation of Japan’s financial and creates a top development of production in Japan. Lastly, there’s a quote for Japan ”The only thing we have to fear is fear itself”. Expectations are giving to Japan to improved monetary policy and yet facilitate to achieve its satisfied capability.


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